Investment Highlights

• We reiterate our BUY recommendation on Star Media Group (Star) with unchanged forecasts and FV of RM1.80/share based on sum-of-parts valuation.

• We came away from Star's 4QFY17 briefing feeling reassured that an earnings recovery is underway. However, we do not discount the possibility of further kitchen-sinking going forward, especially with respect to headcount and printing facilities.

• Currently, there are 4 printing lines in Shah Alam, Selangor, operating at 50% capacity, and 2 lines in Bayan Lepas, Penang with 40% utilisation. We believe the underutilisation gives the group an alternative to shut off 2-3 printing lines, lowering the group's depreciation expenses thereafter. However, this is likely to be accompanied by an impairment of PPE given the difficulties in reselling the printing equipment.

• On the adex front, we believe the group will see a slight pickup in 1HFY18 on the back of increased campaign advertising for a key national event this year, Winter Olympics as well as the 2018 FIFA World Cup. In the past two FIFA World Cup events, Star's 2Q revenue expanded 9-26% YoY as corporations advertised ahead of the games. In addition, we have gathered from our channel checks that FMCG players are getting more aggressive on adspend this year, especially in the first half.

• Overall, we believe Star is set to record better core earnings in FY18. The group has recently concluded a mutual separation scheme/early retirement, reducing its headcount by some 250 employees. Coupled with the cessation of Li TV operations in October 2017 (which contributed RM6-7mil in losses in FY16), the group is expected to reap savings of RM30-40mil in FY18.

• The group has not provided dividend guidance for this year, but we remain sanguine that it will pay out at least 6 sen, implying a decent dividend yield of 4.6%.

• However in the longer term, 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. The group's over-the-top (OTT) platform, dimsum, has also yet to gain traction, garnering only 100K+ downloads in Google Play Store. The OTT platform was made available on Samsung Smart TV in 4Q17. We are hopeful that this will underpin penetration of the app and bring meaningful contribution to the group in the future.

• Nevertheless, we believe Star is oversold at the current price. The company 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.

Source: AmInvest Research - 7 Mar 2018