Maintain overweight: The recent fuel price hike was the mildest in almost six years, since Oct 1, 2004. Over the last 12 years, we note that only the 30 sen hike on Feb 28, 2006, and the 78 sen one on June 5, 2008, really damaged adex sentiment. We expect future fuel price hikes to be similar. The hikes are a part of Pemandu’s subsidy rationalisation programme in which it proposes to reduce subsidies gradually every six months. Therefore, we do not believe that the recent fuel price hike will overtly threaten adex growth this year.

5MCY2010 total adex growth has been nothing short of impressive at 21% year-on-year (y-o-y). TV adex outperformed, surging 29% y-o-y. Newspaper adex, underperformed only so slightly by growing 17% y-o-y. We expect 2H2010 adex growth to moderate due to the high base effect of 2H2009 aided by the recent fuel price hike. A recent interview with a media buyer indicates that he was not concerned about the recent fuel price hike. Advertisers are not cancelling more advertisement bookings than usual. If anything, he concurs with our view that 2H2010 total adex growth will moderate to high single digits y-o-y compared to the strong 1H2010.

We have thus far assumed only 7.5% TV adex growth or 1.5 times real GDP growth for Media Prima and 5% newspaper adex growth or 1 time real GDP growth for The Star. We leave our earnings estimates on both companies under our coverage unchanged for now, pending company visits, but still deem the probability of earnings upgrades likely due to overwhelmingly strong 1H2010 adex growth. Our Media Prima target price is premised on 18 times 1-year forward PER (average since relisting in October 2003: 18 times) and Star TP is premised on 15 times 1-year forward PER (12-year average:   16 times).

Robust adex growth will continue unabated in the light of recovering consumer sentiment so long as fuel and power prices are not raised drastically and suddenly. This run may continue all the way until 2Q2011 if speculation on the 13th General Election being held then materialises. Historically, general elections favour the media sector due to government ad spending. Both Media Prima and The Star are also beneficiaries of a stronger ringgit due to their exposure to newsprint. We estimate that every 10% appreciation in the ringgit will accrete 9% to Media Prima’s earnings and 6% to The Star’s earnings.