Investment Highlights

• We reiterate our BUY recommendation on Star Media Group (Star) with a lower fair value of RM1.80/share (previously RM1.88/share) based on sum-of-parts valuation (see Exhibit 2). We have fine-tuned our FY18FFY19F net profit forecasts by circa 3% for housekeeping reasons.

• Star's FY17 net profit came in above our expectation, but below consensus, at RM24.2mil (-54% YoY). This is after stripping out a series of one-off items amounting to a net gain of RM38.7mil. These items mainly include a gain on the disposal of Cityneon, a net foreign exchange gain, mutual separation scheme expenses and impairment/write-offs of PPE and goodwill. For 4QFY17, core net profit surged nearly 5x QoQ and inched up circa 1% YoY to RM19.4mil.

• The precipitous drop in FY17 earnings was mainly attributed to continued weakness in newspaper adex, which dragged down revenue in the print and digital segment by 18% YoY. This was partially offset by growth in digital media. According to Nielsen Media Research, newspaper adex declined 22% YoY in 2017.

• Broadcasting (radio) is among the more resilient segments, with FY17 revenue dipping 4% YoY. The segment returned to profitability with a PBT of RM5.1mil in FY17 vs. a LBT of RM2.3mil in FY16, thanks to cost savings arising from the disposal of Red FM and Capital FM.

• In the TV segment, revenue dived 41% in FY17 due to the cessation of Li TV operations. Loss before tax for the segment widened by RM10.9mil to RM18.0mil during the period due to impairment of assets. Furthermore, the event/exhibition segment recorded a 30% drop in FY17 revenue owing to lower participation from exhibitors. As a result, PBT of the segment narrowed from RM1.4mil in FY16 to RM0.3mil in FY17.

• Moving forward, prospects of the group remain bleak 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.

• However, we believe Star is oversold at the current price. Star's cost rationalisation exercises this year are expected to bring about savings of RM20-30mil/year. In addition, Star offers good value with a net cash per share of RM0.51 and a price-to-book (P/B) of 1.1x, which is below its 3-year average P/B of 1.25x. Dividend yield is also attractive at 4-5%.

Source: AmInvest Research - 28 Feb 2018