Highlights

• We attended Star’s 3QFY16 analyst briefing and left feeling neutral on the group’s future prospects. Below are the salient points.

• Cautios adex outlook… The weak 3Q results are mainly attributed to lower revenue from its adex dependent segments. Outlook for its traditional segments remains dim as print and radio adex tumble.

• Hopeful in Cityneon… Management is expecting better contribution from Cityneon through Victory Hills Exhibition. As the segment turned profitable in Q2, earnings visibility brings comfort amidst the declining adex growth environment.

• Dimsum, still cooking… Star’s latest digital offering, Dimsum, has been launched for circa 2 weeks now and is on-track with management’s plans. Although this is good news as it shows that Star is serious in diversifying its revenue base through a gradual shift from traditional to digital platform, earnings visibility is minimal as the project is still in its gestation period.

• Estimated in 9M16, total industry adex dropped 7.5% qoq and 4.0% yoy, while industry print adex dropped 9.5% qoq and 12.7% yoy. In 2013, GE did not turn out to be a catalyst for Star. Thus, we believe there is limited catalyst for its print segment in the near term. The declining trend might seem disconcerting for Star as its key segments are reliant on adex. However, Star is continuing to broaden its earnings base to include non-traditional segments to offset the decline.

• In the immediate term, we expect a slightly stronger 4Q as it is a seasonally stronger quarter coupled by expected higher contribution from Cityneon.

Risks

• (1) Not getting new IP Rights; (2) Weak Adex growth; (3) High newsprint cost; (4) Threat of new players; (5) Depreciation of RM vs. US$; and (6) Regulatory risk.

Forecasts

• Unchanged.

Rating

HOLD ( ↔ )

• For the immediate term, we see 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 with TP of RM2.50 based on unchanged targeted dividend yield of 6%

Source: Hong Leong Investment Bank Research - 24 Nov 2016