Investment Highlights

• We maintain HOLD on Star Media Group (Star) with a fair value of RM1.14/share based on a P/B multiple of 0.8x. We have cut FY18F-FY20F earnings by 21-34% as the adex outlook seems bleak for 2HFY18 and have adjusted for slower-than-expected traction from its digital offerings.

• We came away from Star’s 2QFY18 analyst briefing with the following key takeaways: .

1. Cost-saving measures improved bottom line despite lower revenue: The group’s improved cost management and restructuring initiatives have resulted in lower opex in 1HFY18 compared to the previous year (-15% YoY).

2. Advertisements still the main revenue driver for print and digital segment: Advertisements made up 73% of print and digital revenue in 2QFY18. Because of this, the group’s 1HFY18 revenue from its print and radio segments was hit by weaker adex sentiment post-GE14. On a positive note, the group shared that 1HFY18 saw signs of decelerating decline in print adex rate compared to 1HFY17.

3. Improvements in digital revenue seen: Digital revenue rose 42% QoQ in 2QFY18 and 17% YoY in 1HFY18. However, its over-the-top (OTT) platform dimsum is still contributing losses due to it still being in its gestation period for the next 3-4 years.

4. Strengthening management team and hiring new talents in line with digital transformation: The group has set up a new product and marketing team and has included the roles of chief technology officer and head of analytics to its senior management line-up to further unlock the group’s potential and enhance its advertising effectiveness.

5. Unlocking the value of Star’s properties: Star plans to unlock value from its land bank, hinting at potentially venturing into noncore opportunities outside the media sector.

• Star did not announce dividends for 1HFY18. Historically dividends were paid out semi-annually. However, we expect the group to still pay out an annual dividend, although at a lower amount. We maintain our FY18F DPS at 6 sen.

• Even though MIER’s consumer sentiment index breached its 100-point optimism threshold, reaching 132.9 in 2QCY18, the sustainability of the improved sentiment could be affected by the implementation of the SST, where advertisers might take a wait-and-see approach. Furthermore, no major adex catalysts are expected in 2HFY18. .

• Despite its cost-saving measures, we remain cautious on Star due to: 1) the continuous decline in newspaper circulation with the shift to digital content, 2) the monetization of digital initiatives remain challenging amid high competition; and 3) the lack of growth component following the disposal of Cityneon.

Source: AmInvest Research - 27 Aug 2018