KUALA LUMPUR (July 5): Hong Leong Investment Bank (HLIB) maintains an "underweight" rating on the media sector, noting several challenges ahead, it said in a note on Friday.

The sector is expected to struggle due to a "continual decline in traditional advertisement expenditure (adex) with increasing options for digital adex", soft consumer sentiment, ongoing "ad spend being hit by the boycott phenomenon", and heavy competition from over-the-top (OTT) platforms, according to the research house.

HLIB downgraded Astro Malaysia Holdings Bhd (KL:ASTRO) to "sell" from "hold", with a trimmed target price (TP) of 23 sen from 30 sen, to reflect a harsh "structural trend of cord cutting" as consumers increasingly opt for cheaper OTT services.

The research house also holds a "sell" call on Media Prima Bhd (KL:MEDIA), with a TP of 31 sen, anticipating continued pressures from structural shifts in media consumption and advertising spending.

Notably, Astro's first quarter of financial year 2025 (1QFY2025) revenue dropped to RM772.5 million, marking its fifth consecutive decline, and core profit after tax and minority interest (Patami) fell sharply by 68% year-on-year (y-o-y).

During the period under review, adex trends are mixed. While free-to-air TV adex grew by 13% y-o-y in the first five months of 2024 (5M2024), newspaper adex dropped by 4% y-o-y as advertisers shift to digital platforms.

The gap between digital and newspaper adex continues to widen: digital adex minus newspaper adex for 5M2024 stood at RM203 million versus RM179 million in 5M2023).

"We view this as a structural decline as viewers opt for ‘cord-cutting’ given the availability of much cheaper OTT alternatives (Netflix, Disney+, HBOGo)," it added.

Meanwhile, HLIB cited the Malaysian Institute of Economic Research (MIER) reporting that 1Q2024 Consumer Sentiment Index stood at 87.1 points, falling below the optimism threshold.

The weaker sentiment is due to concerns over employment, income growth, and inflation.

Additionally, geopolitical tensions, particularly the Hamas-Israel war, have led to a cautious advertising outlook, with companies wary of being linked to controversial issues.

At the time of writing, Astro shares were unchanged at 30.5 sen, valuing the group at RM1.59 billion, while Media Prima settled two sen or 4.1% lower at 46.5 sen, translating into a market capitalisation of RM515.8 million.