- We maintain our HOLD recommendation on Star Publications (Star) with an unchanged fair value of RM2.78/share, based on a 10% discount to our DCF valuation.

- We understand that advertisers remained cautious after the general election, as post-election rallies have caused many events to be cancelled which affected Star’s advertising revenue. This is further dampened by a drop in spending by banks following a tighter control on credit cards, as well as new regulations governing personal and housing loans.

- Print adex fell by 6.3% while online adex fell by 23.3% in 1HFY13 compared with the same period last year. Despite a 4.1% total print adex growth in July, management indicates that Star’s adex is still on a decline YoY.

- Management clarifies that it has reduced its dividend payout despite having a huge cash pile, as the previous payout of 9 sen/share in the first half is not sustainable given its poor performance during the period. We maintain a payout assumption of 9 sen/share in the second half bringing total DPS to 15 sen/share.

- Management also highlighted its intention to reduce operating costs. Newsprint and salary makes up the bulk of this, accounting for 30% each of total operating costs. Star has revealed that it intends to reduce staff headcount by c. 10% from the current 1,600.

- On the other hand, Star is not affected by the weakening ringgit, as it currently has more than 12 months of newsprint stockpile (at an average cost of below USD650/MT), which it intends to reduce to 8 months.

- On another positive note, Cityneon is expected to breakeven this year (vs. a pre-tax loss of ~RM12mil the previous year), while I.Star Ideas Factory’s Perfect Livin’ events will deliver the guaranteed RM10mil pre-tax profit, as it has increased the number of events to 13 this year from 8 previously.

- We retain our earnings forecast and expect adex for Star to remain subdued in FY13, given the weak adex outlook in the English print segment. We expect Star’s adex todecline by 3% for the year, followed by a 1% growth in FY14 and 2% in FY15.

- At the current price of RM2.64/share, the stock is trading at 14x PE, while the current dividend payout assumption 15 sen/share still implies a decent dividend yield of 5.4%.

Source: AmeSecurities