Investment Highlights

• We maintain our BUY recommendation on Star Media Group (Star) with a lower SOP-based fair value of RM1.57/share. We are pegging the valuation of its printing division to a lower FY17 P/B of 0.8x (vs. 1.0x previously) given a hazy operating environment going forward. On the other hand, we have raised our FY18F FY20F net profit forecasts by 4-10% to account for additional savings from the closure of its Penang printing plant.

• We came away from Star’s 1QFY18 briefing feeling mildly optimistic of the company’s plans. The group shared its end-to end transformation plan for 2018 and beyond, which revolves around 3 major themes:

1. Customers at the centre of the business: To provide customers with high-quality content, and marketeers with holistic solutions that are focused on generating additional sales through advertisements (ads). Ads contribute 79% of printing & ad revenue for the group (Exhibit 2).

2. Transforming through analytics: Analytics to guide content areas and increase accountability to marketeers.

3. Economic sustainability: To introduce more digital products and solutions to diversify revenue streams away from print.

• The group has decided to cease operations of its 2 printing lines in Penang in September 2018 as the lines were operating at less than 50% capacity. The plant closure is estimated to lead to total cost savings of around RM13-14mil annually from the reduction of headcount by 70, depreciation and utility expenses. Moving forward, printing orders from Penang will be redirected to Shah Alam. The group has yet to decide on the disposal of the Penang factory but has indicated that it intends to dispose of its printing equipment.

• Moving into 2QFY18, we believe earnings will be underpinned by increased campaign advertising for GE14 and potentially higher adex rates during the coverage of 2018 FIFA World Cup. In addition, management has indicated that the group saw an increase of print orders immediately after the election, which should support circulation revenue this quarter. On the other hand, we remain cautious of 2HFY18 due to uncertainty as circulation is expected to normalize after the buzz of elections and as changes in the Malaysian political scene dwindles.

• The group has not provided dividend guidance this year but we expect a payout of at least 6 sen, implying a dividend yield of 5– 6%.

• Overall, we believe that Star’s prospects are unexciting due to the declining print circulation given the availability of digital content and subdued adex outlook amid weak consumer sentiment. Nevertheless, we believe its restructuring exercises and transformation plan would offset the ailing print prospects. Collective, the group’s restructuring exercises are estimated to reap a total of RM40-50mil savings/year.

Source: AmInvest Research - 24 May 2018