KUALA LUMPUR: Generally, the media industry refers to companies that are involved in print, TV, radio, Internet and outdoor advertising.

“These companies offer content to the public. By doing so, there is a platform for advertisers [or organisations] to advertise. Advertising revenue is a significant stream of income for media companies,” says Imran Yassin Md Yusof, assistant vice-president, analyst — research department, MIDF Amanah Investment Bank Bhd.

Advertising expenditure (adex) grew last year despite the economic uncertainty. According to market research firm Nielsen Malaysia, it grew 11.3% y-o-y to RM2.8 billion in 3Q2011. For the year to September 2011, adex rose 13.4% y-o-y to RM7.8 billion.

Analysts expect adex to taper off, largely due to fears over the ongoing European debt crisis and its effect on the fragile US economy. These events undermine consumer confidence.

Investment research house ECM Libra Investment Research downgraded the media sector from “overweight” to “neutral” on Sept 28, 2011, on the back of a bleak global economic outlook and a higher base effect from 2011. Media stocks under its coverage — Media Prima Bhd, Media Chinese International Ltd and Star Publications (M) Bhd — were downgraded from “buy” to “hold”.

Lim Tee Yang, a research analyst at RHB Research Institute Sdn Bhd, says adex will also be affected by a lack of major global events besides the UEFA European Football Championship and the Olympics this year.

“Media companies benefited from higher advertising rates and increase in volume last year. This year, revenue for media companies will depend on only one factor: volume, and it is difficult to see growth in volume. With fairly resilient domestic consumption and the upcoming 13th general election, the general consensus is that adex will grow at least 5.2% this year. I am expecting growth of a high single digit,” says Kong Heng Siong, a senior associate at OSK Research Sdn Bhd.

Whether local media stocks are cyclical or defensive is inconclusive. “The cost of newsprint correlates with the economy. During good times, newsprint tends to go up [resulting in higher cost]. During bad times, it tends to fall,” explains Kong.

Imran says companies such as Star Publications and Media Chinese are regarded as defensive since their operations have matured and are able to produce a steady stream of dividends.

When selecting a media company, consider these factors:
Type and number of platforms

The best way to differentiate the media companies is by how they deliver content. Each channel of delivery is regarded as a platform. Companies with more platforms tend to capture more advertising revenue. “Companies with limited platforms are likely to be hit badly if there is an economic downturn,” opines Imran.

The media sector is divided into print media and integrated media, which has complete offerings including print, TV and outdoor advertising. Star Publications and Media Chinese are grouped in the former, while Media Prima falls in the latter category. “Newspapers and TV receive the largest portion of adex, about 70% to 80% of the total,” observes Kong, adding that earnings of print media companies tend to be more defensive.

Lim concurs. “In the current economic environment, TV [integrated media companies] is more vulnerable as TV advertising is more expensive. Most companies will be prudent with their advertising budget, and are likely to cut their budget for TV advertising and opt for print or online. However, if the economic growth is strong, the TV segment tends to benefit more,” he says.

With the emergence of the Internet, conventional media companies are starting to deliver their content online (see box story). Catcha Media Bhd, which operates a magazine-publishing business and an online-media business, is the first public company on Bursa Malaysia to derive the bulk of its revenue from online advertisements. The company was listed on July 22 last year.

Number of customers

Another determinant of whether advertisers would be willing to spend depends on the customers of the media companies. “Media companies are starting to realise that they can garner viewers or readers by providing high-quality content. One way to track the number of readers and/or viewers is through Nielsen Malaysia and the Audited Bureau of Circulation,” says Imran.

Kong uses language to gauge the strength of a company’s audience. “I prefer media companies that offer Chinese or Malay content. Nowadays, non-Chinese-literate parents and even Malays are sending their children to Chinese school,” says Kong. Lim notes that circulation for Sin Chew Daily and Harian Metro is rising.

A clear business plan

Media companies, especially in the print media segment, are becoming increasingly diversified due to falling readership. “Diversification helps to increase the media company’s exposure to consumers, but a clear approach is needed.

For example, Media Chinese has a clear approach. Sin Chew Daily targets the mass market, Nanyang Siang Pau focuses on business news and China Press looks at news affecting households.

Guong Ming Daily looks at news relevant to Penang, while Media Prima’s TV network and print media are segmented according to demographics and language,” says Kong, who prefers the approach taken by these companies over the strategy employed by Star Publications.

Compelling valuations

There are a few financial ratios that investors can use to evaluate the potential of a media company. “Given the large size of the media companies, I usually look at the price-earnings ratio [PER]. Based on this ratio, Media Chinese is currently the cheapest media company, followed by Star Publications and Media Prima.

Media Prima is expensive because of its diversified platforms and valuable TV segment. But do not use this ratio to evaluate younger media companies such as Catcha Media. For these companies, look at their acquisitions and how they translate into revenue in the future,” opines Kong.

Imran uses operating margins to measure a media company’s financial viability. An operating margin gives an indication of how much a company makes (before paying for interest on debts and taxes) for each ringgit earned.

“A business that has a high operating margin is generally doing well, as long as it is not piling on debt. It also implies that a company can deliver goods or services to customers at a much cheaper price and still profit,” says Imran.

To select a media company, compare its financial ratios with its peers.

“It is possible to compare the financial ratios of Media Chinese and Star Publications [fairly similar business and their largest expense is newsprint]. But do not compare their ratios with that of Media Prima, which is an integrated media company. To gauge Media Prima’s valuations, compare its financial ratios with its regional peers,” says Imran.