Star’s 1H18 revenue of RM209m (-11.6% YoY) translated into core earnings of RM13.0m (-10% YoY), which came in below ours and consensus expectations. The 2Q18 lower revenue (-8.7% QoQ; -15.1% YoY) was dragged by lower contribution from all three segments but was partially offset by lighter cost structure. Moving forward, we do not expect to see much organic growth in the company, hence we lower our FY18-20 earnings assumptions by 50-54% respectively as we adjust for higher effective tax rate and lower revenue. We downgrade to SELL rating with a lower TP of RM0.91 based on 1.0x FY19 P/NTA.

Below expectations: Star’s 1H18 revenue of RM208.5m translated into core earnings of RM13.0m (-10% YoY), accounting for 30% and 28% of HLIB and consensus full year estimates, respectively. The result disappointment was due to higher than expected tax rate.

QoQ: All 3 segments (print and digital, broadcasting and events) continued to show disappointments. Revenue declined by 8.7% to RM99.5m, despite 2Q18 being an adex friendly quarter. The print and digital segment went into the red and recorded a loss of RM1.3m (impacted by losses from dimsum) as compared to RM20.7m in 1Q. Core earnings plunged by 88.1% to RM1.4m.

YoY: The 15.1% weaker revenue was due to weaker contribution from all segments and the cessation of TV segment. Star’s core net profit declined by 83.5% to RM1.4m from RM8.4m in 1Q17. However after stripping away profit from discontinued operations (Cityneon) in 1Q17, improvement is seen from continuing operations. This is due to previous cost saving measures (MSS/ERO) taken by the group. The lighter cost structure has improved group’s PBT margin by 1.4ppt.

YTD: Despite the 12% lower revenue of RM208.5m, print and event segment showed margin improvement of 5.4ppt and 29.5ppt, respectively. This were mainly due to (i) lower salaries and depreciation expenses; and (ii) more events were held in 1H18 as compared to 1H17.

Disappointment despite 2Q18 being an adex friendly quarter. We expected 2Q18 to post stronger earnings, riding on multiple events like GE14, World Cup and Hari Raya. However, the weaker revenue has alarmed us that the market sentiment had turned cautious despite positive events such as the World Cup.

Outlook. Despite the cost saving measures taken and improved margins seen, we opine that it would be hard for us to witness top line growth through current operating business segments.

Forecast. FY18-20 earnings are lowered by 50-54% as we adjust for higher effective tax rate (35%) and lower revenue.

Downgrade to SELL from HOLD with a lower TP of RM0.91 (previously RM1.04), based on 1.0x FY19 P/NTA.

Source: Hong Leong Investment Bank Research - 20 Aug 2018