-  We maintain our HOLD call on Star Publications (Star) with an unchanged fair value of RM2.47/share, based on our DCF valuation.

-  From the analysts briefing held yesterday, we gathered that the exceptional performance of Star’s print segment in 2QFY14 was due to an increase in display advertisements from its main paper segment. The introduction of high yielding wrap-around advertisements on the front page also contributed to this growth.

-  Consequently, the increase in dividend payout of 9 sen/share in 2QFY14 was due to the strong performance. Management guides that the 9 sen/share payout in the second half would likely be maintained if the group matches its performance last year. Given that we project flat earnings for FY14F, we raise our DPS assumptions to 18 sen/share for FY14F-FY16F.

-  We understand that Star’s VSS exercise is completed. This is expected to generate savings of ~RM5mil p.a. going forward. Additionally, the removal of the executive deputy chairman position would generate a further RM5mil-RM6mil p.a.

-  The group is also mulling over further cost rationalisation measures. These include:-

(i) scaling down its Sarawak printing operations from the current ~10,000 copies to ~3,000 copies, which could lead to savings of ~RM6mil p.a.

(ii) using lower density newsprint of 42gsm compared to the current 45gsm, which may generate savings of RM7mil-RM8mil. However, this is still under evaluation as the thinner material could affect print quality.

(iii) closing of loss-making segments, including magazines SHANG HAI and FACES, and free Chinese newspaper RED TOMATO.

-  However, we believe that the good performance in 2QFY14 may be a poor indicator to Star’s full-year earnings for FY14F. We share the management’s concerns for the second half, as adex may be impacted from ongoing uncertainties due to the MH17 incident, further subsidy rationalisations, and the implementation of GST.

-  Nevertheless, we believe the share price will be held up by the decent dividend yield of 6.5%, based on our assumption of 18 sen/share. The stock now trades at an FY14F PE of 14%, compared with Media Prima’s 13x and MCIL’s 10x.

Source: AmeSecurities