Highlights

• We attended Star’s 2QFY16 analyst briefing and left feeling mildly positive on the group’s fut ure prospect. Below are the key takeaways:

• Management is positi ve on Victory Hill Exhi bition’s (VHE) ability to contribute significantly to the group’s bottomline and has shared thei r business model for their permanent and travelling sets.

• VHE is currently operating its exhibitions based on two IP rights namely Marvel and Transformers with its permanent set in Las Vegas while its travelling sets are in New York, Korea and Paris. Tickets for its US exhibition are approximate US$24-34 per person. Management mentioned that the exhibitions had fulfilled its 1st year profit guarantee.

• The company is focusing on expanding and capturing audiences from Europe, Middle East, China and Singapore through its travelling sets. Pre-opening license fee and royalties are charged during the timeline of the exhibitions.

• Moving forward, we believe VHE needs to outline a concrete execution of its exhibitions (both permanent and travelling), and accurately pinpoint a suitable IP Rights to acquire as an expansion to its collection to stay current and maintain its lucrative earnings growth.

• With the current economic uncertainties and weak business and consumer sentiment, we believe adex for 2HFY16 will remain soft. We expect PB T margi n for the group’s traditional segments will continue in a downtrend. However, we believe this will be mitigated by its more exciting Cityneon’s operations.

• We also note that as at June 2016, Star has tolled the highest amount of unique visitors to its star online and star online business which we believe will aid in getting higher adex by advertisers.

Risks

• (1) Not getting new IP Rights; (2)Weak Adex growth; (3)High newsprint cost; (3) Threat of new players; (4) Depreciation of RM vs. US$; and (5)Regulatory risk;

Forecasts

• We increase our FY17-FY18 earnings forecasts by 2.2% and 1.9%, respectively to account for higher contribution by Cityneon (offset by softer print earnings).

Rating

HOLD

• For the immediate term, we s ee Star’s earnings being affected by cautious Adex growth outlook caused by weak consumer sentiment and sluggish economy. Nevertheless, we begin to turn more positive on the contribution from Cityneon, reinforced by its healthy balance sheet and net cash position.

Valuation

We retain our HOLD call but with a higher TP of RM2.50 (previously RM2.31) after earnings adjustment based on a lower targeted dividend yield of 6% (previously 6.5%) given the lower yield environment.

Source: Hong Leong Investment Bank Research - 26 Aug 2016