Highlights/Comments

We attended Star’s 9MFY14 briefing chaired by its Managing Director/CEO, Datuk Seri Wong Chun Wai and the management team. Below are the salient points:

A pretty good cost management… We believe Star will continue to keep its costs well controlled. Examples of its cost saving efforts are: switching from 45gsm to 42gsm news print – whic h will be effective on 1 January 2015, voluntary separation scheme and right -sizing its operation in Sarawak, importing newsprint from ASEAN countries and streamlining its loss making segments.

Also, Star would be able to benefit from the low news print prices (have been on a downtrend) (see Figure #1). Thus, we expect to see significant savings from the print division.

Appealing dividends… It is likely to retain the div idend payment of 15 sen – 18 sen/share, translating to a dividend yield of 6.6%- 7.9%. We believe the payout level is achievable given its positive annual free cashflow of RM149.5m – RM165.5m and net cash position of RM354.3m (48.0 sen.share) as at 3QFY14.

Future prospect … I t is expecting adex to improve in the next quarter bas ed on the assumption that advertisers would persuade consumers into spending before GST is being implemented. As consumer demand is low, we believe companies would beef up their advertising to boost more sales.

With the fuel subsidy removal for RON95 & Diesel announced on Friday, we anticipate that the already weak consumer sentiment will be further dampened. That said, 2015 would be another slow year for media. Despite that, we feel Star will be able to hurdle through the obstacles due to Star’s print market leader position , continuous efficient cost management and strong cash generating ability .

Risks

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

Forecasts

• FY14, FY15 and FY16 earnings trimmed by 1% -3% as we assume weaker macro environment which contributes to a poorer consumer and business sentiment.

Rating

BUY

• Despite the cautious adex growth outlook, we s ee better prospect for Star based on their prudent cost management , its strong balance sheet with net cash position and attractive dividend yield in the range of 6.6% -7.9%. Also, share price has, since the beginning of November, declined by 12% from RM2.59 to RM2.27 today. Thus, we upgrade Star to a BUY call.

Valuation

• TP revised upwards by 7% to RM2. 73 from RM2. 55 based on an unchanged dividend yield of 5.5% as we inc rease our dividend forecasts from 14.0 to 15.0 sen/share.

Source: Hong Leong Investment Bank Research - 24 Nov 2014