Investment Highlights

• We maintain HOLD on Star Media Group (Star) with a lower fair value of RM2.15/share (previously RM2.37/share) based on SOP (see Exhibit 2). We have trimmed FY17F-FY19F earnings by 31- 51% to account for worse-than-expected declines in print adex.

• Star currently trades at a CY18F PE of 34x, while Media Prima, Media Chinese International and Astro are trading at 13x/11x/18x respectively. Expected dividend yield remains decent at 5-6%.

• Star's 1QFY17 core net profit came in markedly below our expectations and consensus at RM6mil (-61% YoY; -64% QoQ). Excluding a forex gain of RM0.6mil, the 1Q net profit only accounted for 8% of our full-year forecast and 7% of consensus.

• The drastic drop in earnings stemmed from a 23% YoY contraction in 1QFY17 print revenue, while the segment's operating costs in the same period only reduced 8% YoY. As a result, PBT margin in print narrowed significantly by 12ppts from 19% in 1QFY16 to only 7% in 1QFY17.

• The decline in print's revenue was in line with industry's drop in newspaper adex of 23% YoY as reported by Nielsen Media Research. On a brighter note, 1QFY17 digital revenue continued to register robust growth of42% YoY. We estimate that digital contributes ~10% of the "print and digital" segment revenue while print makes up the remaining 90%.

• In the radio division, revenue declined 10% YoY in 1QFY17 as advertisers remained cautious. Nevertheless, the segment swung from a loss before tax of RM0.4mil in 1QFY16 to a PBT of RM1mil in 1QFY17. This was attributed to the disposals of its unprofitable Red FM and Capital FM late last year, which were making a combined loss of RM4mil in FY15.

• We believe the drop in both print adex and radex was largely caused by poor consumer sentiment. Currently, the MIER Consumer Sentiment Index remains below the optimism threshold (100) at 76.6 in 1QCY17. In light of this, we expect sentiment to remain weak in the coming quarters and hence FY17F would be challenging for Star.

• On the other hand, the event/exhibition segment showed a 29% YoY expansion in revenue largely due to a higher contribution from Cityneon's Intellectual Property division, which has the rights to provide exhibitions of Marvel Avengers and Transformers. However, Star has recently agreed to sell its entire stake in Cityneon, by which it could unlock a gain on disposal of RM214mil.We are negative on the move as it would remove the growth component for Star.

• Moving forward, Star will continue to grow its digital revenue through its digital transformation initiative. One such initiative is dimsum.my, a video on demand service which was introduced last year. Management has said that the next stage for dimsum.my will involve more Malay and Indian contents

Source: AmInvest Research - 24 May 2017