RAM downgrades media players as print adex continues to dwindle

KUCHING: RAM Ratings has downgraded the ratings of Media Chinese International Ltd ( MCIL) and Star Media Group Bhd ( Star) – the two media players in its portfolio.

The rating action is premised on the protracted decline in industry advertising expenditure (adex) amid ongoing structural changes in the traditional media sector.

“Industry adex has shown no signs of stabilisation since our previous rating action in November 2017, leading to further erosion of the cashflow generation and earnings of the two entities,” it said in a statement.

“We expect these operating challenges to persist in the coming one to two years.”

RAM said the traditional media sector continues to be impacted by the structural shift towards digital platforms, with no recovery in sight.

Technology- driven changes in media consumption and the proliferation of digital platforms – such as search engines, social media and digital video – have intensified competition within the advertising space.

Coupled with sluggish consumer sentiment and cautious corporate spending, real adex on print fell for the fourth straight year in 2017, slipping 20.2 per cent y- o-y.

“Conversely, we expect digital advertising – reported to have expanded by 17 per cent in 2017 – to gain further traction at the expense of traditional advertising mediums.

“Double- digit declines in advertising and circulation revenue have resulted in persistent pressure on the profitability and cashflows of the two RAM-rated media players.”

Ad revenue from MCIL’s Malaysian operations contracted by 17.8 per cent y- o-y in FY Mar 2018. MCIL’s overseas operations had also been affected, with ad revenue registering double- digit drops. Given its hefty fixed costs, MCIL’s operating profit before depreciation, interest and tax plunged 30.3 per cent y- o-y.

Additionally, more subdued longterm prospects had necessitated impairment charges of US$ 26.80 million on its Malaysian operations.

“This led to a pre- tax loss of US$ 6.87 million, MCIL’s first loss in a decade. Similarly, STAR posted its maiden quarterly loss in 4Q FY Dec 2017 due to one- off expenses totalling RM189.83 million.

“The more buoyant consumer mood – following wide-ranging measures announced by the new government to reduce the cost of living – and a potential lift from the 2018 FIFA World Cup are expected to provide a brief respite from the adex decline. Nonetheless, the traditional media sector is expected to continue to face challenges in the longer term.

“Likewise, increased press freedom under the new administration in Malaysia and the proposed abolition of the Printing Presses and Publications Act 1984 (a law that is seen to curtail freedom of the press) while to some extent viewed as levelling the playing field with independent alternative news portals, are not anticipated to be a game changer.”

That said, RAM said MCIL and STAR remain dominant players within the traditional media industry and their robust balance sheets with net- cash positions continue to support their credit profiles.

“A lighter debt load had improved STAR’s adjusted gearing ratio to 0.12 times as at end- December 2017, while MCIL’s adjusted gearing stayed relatively unchanged at 0.35 times as at end-March 2018. We expect these two players to retain their balance sheet strength.”