- We maintain our HOLD call on Star Publications (Star) with a reduced Fair Value of RM2.30/share (previously RM2.40/share) based on our DCF valuation, reducing our FY15-FY17 estimates by 8-10% accounting for lower margins from Events segment and lower adex assumptions for 2015 and 2016.

- Star registered 3QFY15 core earnings of RM23.6mil (-29% QoQ, -31% YoY), extending 9MFY15 core earnings to RM85.1mil. The results were slightly below expectations, coming in at 59% of our FY15 estimates, and 63% of consensus. In previous years, 9M earnings came in at around 70% of FY estimates.

- The key reason for the poorer result was the underperformance of the Events segment, which made a loss before tax of RM3.6mil in 9MFY15. While Events earnings often fluctuate due to timing recognition, the poor quarter results was largely due to lower profit margins from Cityneon due to higher direct costs as well as the related acquisition costs of Victory Hill Exhibitions. In addition, the I.Star Ideas Factory has also seen a drop in revenue, which we believe is due to the slowdown of exhibition activities, on the back of a subdued economy and housing sector in Malaysia.

- Print registered a 4.7% QoQ drop in revenue, despite Q3 usually being one of the stronger quarters due to the Hari Raya festivities in July. The result concurs with Nielsen’s reported 9M15 Adex drop of -4% YoY. However, Print registered PBT of RM120.2mil increased by 2.4% YoY from better margins.

- In a recent development, Cityneon has completed the acquisition of Victory Hill. Despite the guaranteed SGD2.8mil first year profit to Cityneon (SPA terms), we are neutral on this and remain conservative until we see sustainable earnings from the new addition.

- We remain cautious on the adex outlook for the end of the year moving to next year, given that the MIER Consumer Sentiment Index has reached a new 6-year low in 3QFY15 of 70.2 points (vs 3QFY14: 105 points).

- On a more positive note, Star remains in its long-standing position as Malaysia’s top English newspaper with a loyal readership of >285k readers (Dec ’14 audited numbers), with a long-sighted strategy on media digitalisation to embrace the next generation of readers and changing advertising trends.

- We reduce our dps assumption to 17sen (18sen previously), which reflects a core earnings payout ratio of 98%.

- The stock should continue to be supported by its good dividend yields of ~7%. The stock currently trades at 13.5x FY15F PER, compared to Media Prima’s 10x and Media Chinese’s 8x.

Source: AmeSecurities Research - 17 Nov 2015