• We maintain our UNDERWEIGHT recommendation on Star Media Group (Star) with a lower fair value of RM0.27/share, pegged to a lower PB of 0.25x which represents -1.5SD to its 1-year historical PB of 0.34x (previously RM0.31/share, pegged to a PB of 0.3x).

• We project wider losses of RM70mil for FY20F (previously RM58mil loss) as we expect its print & digital segment to continue its weak performance into 4Q, while projecting narrower FY21F–FY22F losses in anticipation of gradual adex recovery as Covid-19 restrictions ease further.

• Star’s 3QFY20 results disappointed, recording a core loss of RM22mil which brings 9MFY20 core loss to RM53mil, after excluding RM49mil net one-off gains as compensation income of RM50mil for the late delivery of vacant possession of its investment property under construction from Jaks Island Circle Sdn Bhd in 3QFY20 offset allowance of credit losses. The results exceeded our and consensus’ full-year loss estimates of a FY20F loss of RM58mil and RM39mil respectively.

• YoY: In 9MFY20, a core loss of RM53mil was recorded (vs. RM5mil core profit in 9MFY19) due to a 39% dip in revenue across all segments, particularly for its print & digital and event & exhibition segments which dropped by 39% and 77% respectively, amid the impact of Covid-19 and the movement control order (MCO) causing advertisers to turn cautious and cancellations of its offline events. Its radio segment also saw revenue dropping by 21% due to the subdued adex market. The effective tax rate for 9MFY20 was higher than the statutory tax rate due to the recognition of compensation income for the late delivery of vacant possession of its investment property aforementioned.

• QoQ: Core loss narrowed by RM4mil after the government’s easing of MCO restrictions saw gradual improvement in revenue for its print & digital and radio segments.
• Besides cost optimization and transformation initiatives, Star has executed virtual fairs and events in place of physical ones, while also launching more digital products such as: (i) theStarMall which sells bags and apparels with customization options; (ii) BeliLokal in support of local businesses, and (iii) Suria (radio) mobile application. Meanwhile, the group’s new service SMG Brand Studio acts as a one-stop shop for advertisers and aims to increase ad take-up rates.
• We remain cautious on Star’s unexciting prospects where declines in its traditional media segments which have been worsened by Covid-19 impacts are yet to be mitigated by growth in its digital earnings due to difficult monetization amidst intense competition. Furthermore, the group’s over-the-top platform dimsum is still in its gestation period. Nevertheless, the group has a net cash of RM359mil and no borrowings as at 30 September 2020 which will enable it to weather through these difficult times.

Source: AmInvest Research - 13 Nov 2020