- We downgrade our recommendation on Star Publications from BUY to HOLD, with a lower fair value of RM2.78/share (from RM3.10/share previously), based on a 10% discount to our DCF valuation, following the release of its 2Q results.

- We reduce Star’s FY13F-FY15F earnings by 12%-14%, as we revise our adex growth assumption for Star. We now expect Star’s adex to decline by 3% for the year (vs. +1%) followed by a gradual 1% and 2% growth in FY14F and FY15F, respectively.

- This is in view of the weak adex outlook in the English print segment. The contraction in its “classifieds” adex due to thriving online portals such as iProperty and JobStreet.com also contributed to Star’s decline in adex.

- Star recorded a 2Q net profit of RM29mil, bringing 1HFY13 net profit to RM55mil (-29% YOY). This is below expectations, accounting for only 35% and 33% of our and consensus estimates.

- 1HFY13 top line declined by 10.9% from RM529.4mil to RM471.94mil mainly due to lower advertising revenue for the first half of the year and also lesser projects completed by Cityneon in the current period. However, Cityneon is expected to turnaround this year due to significant cost savings. It was also noted that its sales order book stands at SGD93mil, of which 70% is expected to be realised this FY.

- The radio broadcasting segment also saw a bigger pre-tax loss of RM3.5mil vs. RM0.6mil in the same period last year, due to lower airtime revenue, as well as higher advertising and promotion expenses incurred. In addition, its TV segment recorded a pre-tax loss of RM3.7mil due to higher programme and marketing expenses.

- The group declared a first interim dividend of 6.0sen/share, lower than previously declared in the same period due to lower profitability achieved by the group during the financial period. We have thus assumed a lower payout of 15sen/share for the year, compared with 18sen/share previously.

- Newsprint is currently traded at US$590/MT. However the recent weakening of the ringgit against the USD has offset the declining trend in the newsprint spot price. No effect on Star in the near term as it currently has an inventory level of 14-16 months.

- The stock is currently trading at a steep level of 16x PE on FY13F earnings, compared with Media Chinese’s 10x and Media Prima’s 13x. The current dividend payout assumption implies a yield of 5.4%.

Source: AmeSecurities