Highlights/ Comments

We attended Star’s 1HFY14 briefing chaired by the Group COO Calvin Kan, and the management team. Below are the salient points:

2Q review… The tremendous improvement in their performance was attributed by most of the key divisions particularly the Event segment (Cityneon). Insofar, Star’s epaper has attracted 90k subscribers. Regarding its partnership with Bloomberg TV Malaysia, the programme will go live in September.

Streamlining operations… Upon completion of the VSS exercise, we are anticipating further reduction in expenses in the quarters ahead. Other cost cutting initiatives would be: 1) Importing newsprint from ASEAN countries which would ultimately save them 10% import duty; 2) Switching to 42gsm newsprint instead of the existing 45gsm. (Star will be able to reduce RM7-9m p.a); and 3) Rationalisation of its loss making segments. Given its prudent cost management track record, we believe the above efforts will yield positive outcome.

Dividends… We were positively surprised by its 9 sen/share dividend announced in 2Q. Management highlighted that there could be a potential return to the previous high of 18 sen/share p.a. We believe the group will have no hiccups in returning to peak dividend level considering its net cash position of RM293m or 39.7 sen/share as of 2QFY14 as well as annual free cash flow of RM150-165m (20.3-22.3 sen/share).

2HFY14 muted adex outlook… Management shared that it is expecting a slower 3Q mainly caused by weak consumer sentiment resulting from government subsidy rationalisation, GST implementation, and the spill-over effect of MH17 tragedy that occurred in July. Although we expect a seasonally stronger 2H, we remain cautious on the overall adex outlook and believe that adex spending will remain lacklustre.

Risks

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

Forecasts

FY14 and FY15 earnings trimmed by 3% and 1% as we assume slower adex growth due to the recent tragedies and weaker consumer sentiment.

Rating

HOLD

Despite the cautious adex growth outlook, we see better prospect for Star based on their prudent cost management coupled with narrowing losses from its TV segment, and its strong balance sheet with net cash position. Hence, we are reiterating our HOLD call on the company

Valuation

TP revised upwards by 9.2% to RM2.55 from RM2.33 based on a lower targeted dividend yield of 5.5% (6.0% previously) as we expect higher free cash flow arising from its efficient cost management coupled with narrowing losses from its TV segment as well as to account for potential dividend surprise. We still retain our estimated dividend of 14.0 sen/share.

Source:Hong Leong Investment Bank Research - 21 Aug 2014