Investment Highlights

• We maintain our HOLD recommendation on Star Media Group (Star) with a lower fair value of RM0.31/share (previously RM0.42/share), pegged to a PB of 0.3x, which represents a discount to its 1-year historical PB of 0.5x.

• We have lowered our PB in light of slower-than-expected traction in its digital initiatives and continued deterioration in its traditional segments’ earnings. We also slash FY20F–FY22F forecasts by 30–72% amid expectations of dampened sentiments relating to the coronavirus disease 2019 (Covid-19) outbreak impacting the group’s advertising revenues.

• We have gathered the following key updates from Star’s management:

• FY19 summary: Star recorded an FY19 core profit of RM7.6mil, plunging 73% YoY as revenues shrank 20% amid the weaker adex environment impacting its print & digital and radio segments, and less events held affecting its events segment performance. .

The group saw a higher effective tax rate of 61% (vs. 39% in FY18) due to: (i) unabsorbed capital allowances which were brought forward and fully utilized in FY18; (ii) initial tax allowance claimed in FY18 due to PPE; and (iii) lower group relief for FY19.

• Paywall implementation: The group now divided its news articles into three categories: free, metered and premium. For metered and premium articles, users are given a limited quota of articles per month and the articles are put behind a paywall. Meanwhile, on 11 March 2020, the group announced The Star Digital Access which offers an introductory price of RM1.90 for the first month and RM9.90 monthly thereafter for unlimited access to thestar.com.my and its companion app, as well as full access to personalization features. We reiterate our view that Star’s decision to introduce a dynamic paywall will negatively affect the Star Online’s page traffic. However, a successful implementation of the paywall depends on: (i) the group’s ability to leverage its analytic capabilities to personalize users’ reading experience; (ii) the ability of its content to attract and maintain readership, and (iii) the reception of readers due to competing sites which are free.

• Over-the-top (OTT) updates:

o Ads on dimsum: After offering advertising options progressively in 2019 on its OTT platform dimsum, the group said that it saw higher advertising and sponsorship revenue. Furthermore, Star saw a shift from programmatic advertisements to advertising on dimsum, particularly for 1QFY19.

o New partner for educational content: On 13 March 2020, Star partnered with SayPBS, a design academy, to enhance its education content offerings. Previously, the group announced its e-tuition programme on dimsum in 3QFY19, but partnering with SayPBS will add more e-tutorials and infographics revolving science topics that are tailored to the SPM syllabus. dimsum’s existing education partners include EZLearn2u, Miao Mi and Kuntum. Users can now subscribe to the e-tutorials at a special rate of RM10/monthly using a special promo code STUDYJER.

o Partnership with MediaCorp: On 28 February 2020, the group inked an agreement with Singapore’s Mediacorp to offer Thai content on meWATCH (a digital video service by Mediacorp).

o Watch & Shop: In December 2019, the group introduced its new Watch & Shop feature in collaboration with ecommerce platform Shopee, allowing subscribers to shop for items ranging from beauty, health, fashion, home and living, and etc featured in dimsum content. The group had launched several festive campaigns such as its Chinese New Year and Valentine’s Day shopping campaigns with Shopee.

• Print and digital segment updates: Star has introduced more marketing initiatives to entice businesses to increase ad spend across all of its platforms i.e. print, radio, The Star Online and dimsum. The group has also started selling its Kuntum magazine through its existing newspaper vendors in order to further streamline operations.
• Worrying outlook for FY20: The recent Covid-19 outbreak on top of both global and local headwinds are anticipated to result in a subdued economic environment overall, with advertisers expected to remain more cautious on their expenditure and thus potentially impacting Star’s performance.
• We maintain HOLD on Star amid its unexciting prospects as we remain concerned that the performance of its digital initiatives including that of dimsum would not be able to cushion the decline in traditional media segments i.e. print and radio, as well as events. This is despite its cost optimization efforts seen over the years which we worry might not be enough to offset the strong falls in revenue in the challenging operating environment.

Source: AmInvest Research - 18 Mar 2020