Highlights

• We took part in Star’s quarterly analyst briefing, presided by its Managing Director / CEO, Datuk Seri Wong Chun Wai and the management team. We left feeling neutral on the sector and business outlook.

• Adex is estimated to remain flat for FY15. We believe the trend shall continue into FY16. Management expects 4QFY15 to be challenging.

• Star noted that it will be expanding into digital media via its Star TV (which was launched on 10th September 2015) as well as mobile aps.

• On 15th September, an alliance was formed between Star and The National Broadcasting Corporation (NBC), a subsidiary of National Multimedia Group of Thailand to resource digital content for Star TV.

• For its event and exhibition segment, Cityneon will continue to explore opportunities locally as well as in other SEA countries such as Vietnam and Myanmar. The next venue for Cityneon’s Marvel and Transformers exhibition would be in Las Vegas. Management plans to make Las Vegas as a permanent venue for its exhibitions and imitate the successful Titanic Exhibition for its Marvel & Transformers exhibits.

• We expect a higher FCF position as we expect no major increment in capex in the near future. YTD it has achieved approximately RM115.0m of FCF, which translates to a FCF yield of 6.6%. Despite slower earnings, we believe Star should be able to retain its dividend payment similar as last year. Currently has a net cash position of RM418.3m.

Risks

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

Forecasts

• Lowered our FY15-FY17 net profit forecasts by 12%-14% as we expect lower revenue across all media platforms.

Rating

• HOLD
• For the immediate term, we see Star’s earni ngs being affected by the cautious Adex growth outlook caused by weak consumer sentiment resulting from a few factors such as inflationary cost pressures, weakening RM, political issues in Malaysia, potential subsidies removal coupled with slowdown in economy. Hence, we downgrade our call to HOLD.

Valuation

• We downgrade to HOLD with lower TP of RM2.31 based on higher targeted dividend yield of 6.5% (6% previously) to compensate the risk of continued weak Adex envi ronment . Despite slower earnings, we believe Star should be able to maintain its dividend payment to investors.

Source: Hong Leong Investment Bank Research - 25 Nov 2015