Highlights

We attended Star’s 1HFY13 briefing chaired by the Executive Director, Datuk Seri Wong Chun Wai, and the management team. Below are the salient points.

1H review… Management clarified that the cautious mood by advertisers during the build-up towards the GE has led to Star’s weak earnings performance. The company did not benefit from the election spending on campaign ads. The drop in Adex revenue came from the banking and property sector which curtailed Adex spending. The classified segment also continued to see attrition towards the online platform.

July still weak… The start of 2HFY13 (month of July) was still weak as Adex revenue was still lower on a YoY basis. Hence, indicating that despite the conclusion of GE, Adex spending remains lacklustre. Although Adex growth may rebound in 2HFY13, we retain our view that Adex growth will still be weak for CY2013.

Bright spot in events… On a brighter note, CityNeon (64% stake) will be able to breakeven this year given the order book in hand worth S$93m, while Perfect Livin’ is on track to meet its PBT guarantee target of RM9-10m/year.

Newsprint stable… Despite the sharp appreciation in US$, newsprint cost will be stable for Star as they have >12 months stock levels at ~US$650/MT at an exchange rate of ~RM3/US$. Current newsprint prices are about US$600- 630/MT.

Lower dividends… Star declared 6 sen/share dividend for 1HFY13, which was lower than last year’s payout of 9 sen/share. Management has hinted strongly that dividend will most likely be lower than last year’s full year payout of 18 sen/share unless earnings rebound strongly in the 2HFY13.

Potential privatisation… Although rumours of privatisation have surfaced, we believe that it will be a politically challenging process given MCA’s 42.5% stake in the Star.

Risks

Weak Adex growth; High newsprint cost; Threat of new players; Depreciation of RM vs US$; and Regulatory risk.

Forecasts

FY13 and FY14 earnings slashed by 17% and 17.3% respectively on the back of lower Adex revenue and higher expenses.

Rating

HOLD

For the intermediate term, we see Star’s earnings being impacted by the weak Adex growth outlook, gestation period of new business ventures and cost optimisation plan. Hence, we are reiterating our HOLD call on the company.

Valuation

As a result of lower forecasted dividend of 16 sen/share, we slash our TP by 11.2% to RM2.46 from RM2.77 based on required dividend yield of 6.5%.

Source: Hong Leong Investment Bank Research - 21 Aug 2013