Investment Highlights

• We maintain our HOLD recommendation on Star Media Group (Star) with a lower fair value of RM0.42/share (previously RM0.47/share), based on a lower FY19 BVPS (book value of equity per share) of RM1.11. This BVPS is pegged to a PB of 0.4x, representing a discount to its 1-year historical PB of 0.5x.
   
• We trim our FY20F–FY21F earnings by 4-8% to account for the coronavirus disease 2019 (Covid-19) outbreak’s impact causing a depressed adex environment and impacting its events segment earnings, based on the group’s outlook.
   
• Star’s 4QFY19 core profit of RM2.5mil came in above expectations, bringing FY19 core profit to RM7.6mil. This is after excluding net one-off losses amounting RM2.0mil, mainly due to loss on liquidation of a subsidiary which was offset by reversal of allowance on credit losses. The results were above our full-year forecasts by 13% but roughly in line with consensus’ estimates. The variation between our forecasts and actual results were due to cost savings that lifted its print & digital segment PBT in 4QFY19.

• FY19 core profit plunged 73% YoY amid: (i) higher effective tax rate of 61% due to the tax impact of non-deductible expenses; and (ii) revenue dropping 20% as revenues across all segments saw declines. This was despite operating expenses shrinking 20% YoY from its cost-saving initiatives.

• Reduced ad spend dragged traditional media earnings: Print & digital and radio segment revenues dropped by 18% and 16% respectively due to a slowdown in adex. However, digital revenue grew 18% YoY as customers’ preference trended towards more digital content. Meanwhile, the group’s print and digital PBT showed a 74% jump YoY due to lower base effect i.e. FY18 impacted by MSS/ERO.

• Events & exhibition segment performance worsened: Star’s Perfect Livin’ held less events in FY19, causing revenue and PBT to contract by 20% and 34% YoY respectively.
   
• The group declared a 2 sen dividend in FY19 (vs. FY18’s 3 sen), which represents a 7.6% dividend yield. We have assumed that the group will continue to pay out similar dividends for FY20F–FY22F.
   
• Negative FY20F outlook: Star anticipates a subdued economic environment amid domestic and global uncertainties such as the coronavirus disease 2019 (Covid-19) outbreak, which will impact its performance.

• We maintain HOLD on Star due to its unexciting prospects as we are concerned that its growth in digital revenues would not be able to cushion the declines in print, radio and now also its events segment. Furthermore, the long gestation and challenging monetization of its digital initiatives such as its over-the-top platform dimsum is worrisome.

Source: AmInvest Research - 28 Feb 2020