Investment Highlights

• We upgrade Star Media Group (Star) from HOLD to BUY with an unchanged forecasts and fair value of RM1.88/share based on SOP. We believe the recent selldown of Star shares is overdone in spite of duller prospects without Cityneon. At the current price, Star offers attractive upside and dividend yield, which are estimated at 6-8%.

• Star's 3QFY17 core net profit from continuing operations came within our expectations, but below consensus, at RM4mil (nil QoQ, -71% YoY). This brings 9MFY17 core net profit to RM5mil (-89% YoY), accounting for 56% of our full year forecast and 14% of consensus estimate.

• Note that we have stripped out gains on disposals of Cityneon and other quoted investment(s) as well as a forex gain in deriving the core net profit. Collectively, these items amounted to RM214/RM215mil in 3QFY17/9MFY17. In addition, we have excluded earnings from Cityneon (discontinued operations) in our core profit calculations.

• 3QFY17 net profit swung back into the black from a loss of RM1.5mil in the previous quarter. According to management, this was attributed to a slight improvement in print adex as well as radex. For 9MFY17, earnings were dragged by an 18% decline in revenue, mainly due to ailing circulation and adex rates in print. We believe earnings will pick up in 4QFY17 on the back of year-end promotions and holiday-season advertisements.

• According to the Malaysian Institute of Economic Research, the Consumer Sentiments Index (CSI) retraced from 80.7 in 2QCY17 to 77.1 in 3QCY17 owing to deteriorating household income and concerns over rising inflation. Using the CSI as a gauge for spending, we believe the group could continue to see declines in both adex rates and volume, especially in print. However, in the event that the CSI breaches above the 100-mark (optimism threshold), we may turn positive on the adex outlook.

• Moving forward, prospects of the group appear unexciting due to: (1) the continuous decline in newspaper circulation amid increasing availability of digital content; (2) a subdued adex outlook against the backdrop of weak consumer sentiment; and(3) lack of growth component after the disposal of Cityneon.

• Nevertheless, we understand that the group is in the midst of finalising a rationalisation exercise, although its impact is unquantifiable now. Coupled with the cessation of Li TV Holdings by 4QFY17 and its expanding digital revenue, earnings are expected to recover to a comfortable level by FY19F.

• At the current price, Star offers good value with a price-to cash of 0.33x (net of borrowings and dividend payable) and a price-to-book (P/B) of 0.99x, which is below its 3-year average P/B of 1.25x.

Source: AmInvest Research - 21 Nov 2017