RAM Ratings has revised its outlook on the local media sector to negative from stable in view of ongoing structural change and persistently lethargic consumer sentiment that have led to plummeting advertising expenditure (adex). We are also concerned that adex will drop at a quicker pace going forward. The outlook on the AA1 long-term ratings of Media Chinese International Limited’s (MCIL) and Star Media Group Berhad’s (STAR) debt issuances has been accordingly revised to negative from stable. Meanwhile, the negative outlook on Media Prima Berhad’s (Media Prima) AA1 long-term rating remains unchanged.

Published on 22 Jun 2017.

RAM Ratings has revised its outlook on the local media sector to negative from stable in view of ongoing structural change and persistently lethargic consumer sentiment that have led to plummeting advertising expenditure (adex). We are also concerned that adex will drop at a quicker pace going forward. The outlook on the AA1 long-term ratings of Media Chinese International Limited’s (MCIL) and Star Media Group Berhad’s (STAR) debt issuances has been accordingly revised to negative from stable. Meanwhile, the negative outlook on Media Prima Berhad’s (Media Prima) AA1 long-term rating remains unchanged. 

The local media sector has been plagued by declining advertising revenues – a result of the continuing shift away from traditional media platforms. Digital media has gained traction as access to the internet and digital devices become more affordable. Further, consumers are offered higher broadband speeds and larger data packages. These factors have catapulted media consumption into the digital sphere, where content can be accessed on-demand and on-the-go. Given their growing reach, online advertising platforms, which generally offer lower prices, have increasingly infiltrated the advertising space, resulting in mounting competition.

Softer adex was compounded by weak consumer sentiment and cautious corporate spending. “Notably, real ad spend (on TV and newspapers) has been on a downtrend, declining at an average annual rate of 8% over the past 4 years. The decline has also accelerated,” said Kevin Lim, Head of Consumer and Industrial Ratings. “RAM estimates a drop in overall industry real adex (on Pay TV, free-to-air TV and newspapers) of about RM280 million or 11% in 2016 (2015: -7%; 2014: -7%), despite major sporting events in the second half of the year,” added Lim. This is a steeper decline than our expectations of about 3-5%. 

Non-discounted adex was reported (by Nielsen) to have slipped a further 15% y-o-y in 1Q 2017. We expect adex to stay muted going forward, notwithstanding the 2017 SEA Games and a possible general election this year. Over the longer term, we envisage adex on traditional media platforms to continue its downtrend as advertisers increasingly opt for non-traditional forms of advertising. However, the pace of the decline remains to be seen. 

Amid the challenging adex environment, RAM-rated media players – MCIL, Media Prima and STAR – have seen contractions in ad revenue over the past few years. These 3 media heavyweights registered a drop in their aggregate ad revenue (for TV and print) of about RM300 million or 14% in 2016. The steady decline in ad revenue has taken a toll on their operating performance, pressuring revenue and earnings. Operating profit before depreciation, interest and tax of these players deteriorated between 30% and 58% for their latest full fiscal years. 

Despite the challenging operating environment, we note that all 3 media players have very conservative balance sheets, boasting net-cash positions. While Media Prima is not envisaged to maintain a net-cash position following its proposed acquisition of Rev Asia Holdings Sdn Bhd, its balance sheet is expected to stay conservative. Although the cashflow generation of the 3 players has weakened in line with poorer operating performances, funds from operations debt coverage remains robust at around 0.30 to 0.40 times due to relatively low debt levels. MCIL, Media Prima and STAR also continue to hold dominant positions within the local media industry. 

The following rating actions have been taken in respect of the 3 players. The outlook on Media Prima’s long-term rating, which was revised to negative last year, also reflects our concerns over its reduced print circulation as well as lingering uncertainty surrounding the rollout of digital terrestrial TV.
 

Company	Issues	Rating	Rating Action
Media Chinese International Limited	RM500 million Medium-Term Notes Programme (2014/2029)	AA1/Negative	Outlook revised to negative
Star Media Group Berhad	RM750 million Commercial Papers Programme (2011/2018) RM750 million Medium-Term Notes Programme (2011/2026)	P1 AA1/Negative	Reaffirmed Outlook revised to negative
Media Prima Berhad	RM500 million Commercial Papers/Medium-Term Notes Programme (2012/2019)	AA1/Negative/P1	Reaffirmed

Analytical contact
Chan Yisze
(603) 7628 1111
yisze@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my