Highlights

• We attended Star Media Group’s analyst briefing and walked away with no surprises. The group is expecting a soft FY17 outlook.

• Print has been affected by the lower advertising revenue caused by poor market sentiment. 1Q17 revenue declined by 19.5% YoY due to the significant 15.5% YoY decline in total newspaper adex. However, adex spending on English newspaper is still dominated by Star.

• Moving into digital (epaper), in 1Q17 epaper subscription in East Malaysia increased by 14.7% to 7k subscribers. The group had also ceased distribution of print in Sabah/Sarawak on 1 Feb 2017.

• Star’s event segment has been gaining momentum thanks to Cityneon’s performance. As at 1Q17 Cityneon contributed 9% and 16.5% of total group’s revenue and PBT, respectively. Moving forward, with the disposal of Cityneon we see a sluggish contribution from the event segment.

• The group has now shifted their focus back to the OTT venture, dimsum. Dimsum is broadening the strength of its Asian content through branded VOD with regional partners; it now has the most Thai contents in the region. Besides that, dimsum is partnering with multiple telco company for better promotions. It has sealed deals with CITVC, Shanghai Media Group, Japanese broadcaster TV Asahi, MediaQuiz Entertainment International and MediaCorp.

• Outlook: Traditional media is currently facing the digital disruption. Moving forward, outlook of the company remains subdued with challenges from the continued weak consumer sentiment and economic uncertainties. However, we foresee Star to further diversify into different segments in line with its effort to diversify away from traditional media.

Risks

• (1) Weak Adex growth; (2) High newsprint cost; (3) Threat of new players; (4) Depreciation of RM vs. US$(5) Regulatory risk.

Forecasts

• We raise our FY17-19 earnings forecast by 14.9%, 14.0% and 12.3% to RM99.1m, RM100.9m and RM102.3m respectively after tweaking some operational parameters based on latest guidance.

Rating

• HOLD 

• We see Star’s earnings being affected by cautious Adex growth outlook caused by weak consumer sentiment and sluggish economy. Nevertheless, the ability to pay 18sen DPS per year (7.8% yield at current price) may curb downside to share price despite weak fundamentals.

Valuation

• Since our previous downgrade, share price has corrected by 8.2%. As such, we upgrade the stock to HOLD as the downside (total expected return) is less than 10%. Our revised TP of RM1.98 (from RM2.00) is based on 14.5x FY18EPS, a 10% discount to regional peers’ average (see Figure #2).

Source: Hong Leong Investment Bank Research - 31 May 2017