Investment Highlights

• We downgrade Star Media Group (Star) from HOLD to SELL with a lower SOP-based fair value of RM1.88/share (from RM2.15/share previously) — see Exhibit 2. In addition, we have trimmed our FY17F-FY19F core profit forecasts by 5- 77% following a huge disappointment in 2QFY17 results. Accordingly, we have cut our FY17F-FY19F dividend forecasts from 12-15 sen to 8-12 sen.

• Star slipped into a loss after tax of RM1.5mil in 2QFY17from net profits of RM3.3mil in 1QFY17 and RM34.6mil in 2QFY17.This narrows 1HFY17 core net profit to RM1.8mil, which is markedly below expectations at 5% of our full-year forecast and 3% of consensus. The profits/losses are adjusted for Cityneon's contributions (discontinued operations).

• The negative surprise stemmed from a drastic decline in print revenue (1HFY17: -21% YoY vs. -17% expected for FY17F) while reduction in overheads took a slower pace. This narrowed the group's EBIT margin from 14% in 1HFY16 to 3% in 1HFY17, which was significantly lower than 8% forecasted for FY17F. We note that the YoY contraction in 1HCY17 print revenue was less severe compared to industry's 23% decline in newspaper adex during the same period.

• In radio, PBT declined 49% QoQ in 2QFY17 despite a slight improvement (1% QoQ) in revenue. This means that the division incurred higher operating costs during the quarter, denting PBT margin by 5ppts to 5.5% in 2QFY17. Contracting margins in the division can be alarming given that it contributed about 23% of 1HFY17 group PBT. If the division dives into the red, the group may not be able to cushion losses from other segments going forward, considering that its print segment has been on a declining streak.

• On a brighter note, the MIER Consumer Sentiment Index (CSI) improved for the third consecutive quarter from 73.6 in 3QCY16 to 80.7 in 2QCY17. This signals a possible recovery in consumer spending and consequently, adex, for the forthcoming quarters. Should the CSI breach above the optimism threshold (100), we may turn positive on the sector's adex outlook.

• Star declared the first interim dividend of 6 sen (2QFY16: 9 sen) for the year FY17 along with a special dividend of 30 sen following the completion of Cityneon's disposal in July 2017. The dividend is slightly below our expectation of 7 sen.

• We are calling a SELL on Star in anticipation of: (1) further declines in newspaper circulation amid increasing availability of digital content; (2) subdued adex outlook against the backdrop of weak consumer sentiment; and(3) lack of growth component after the disposal of Cityneon.

Source: AmInvest Research - 22 Aug 2017