We attended Star’s analyst briefing last week and came away with a rather neutral view. The group has plans of unlocking it landbank’s value, and may diversify away from its core business. We do see any catalyst for 2H18 and we opine that the cost saving measures may not be strong enough to cushion the falling revenue. We turn conservative on Star’s payout, as the group may choose to preserve cash for potential M&A. We lower our DPS assumption from 9sen to 6sen. We upgrade to HOLD with a higher TP of RM1.00 based on 1.0x FY19 P/NTA.

We attended Star’s analyst briefing last week and came away with a rather neutral view. Below are the key takeaways from the briefing.

Consolidating printing facilities in Shah Alam. The Bukit Mertajam, Penang printing plant will cease operation by 1st September, and all printing facilities will be relocated to Bukit Jelutong, Shah Alam, which is currently running at only 40% utilisation rate. Besides that, Star Media Group’s Shah Alam printing plant is one of the youngest plant in town and is extremely underutilised. The group has the ability to take up printing production for other houses (as previously mentioned the newsprint community are in talks of centralising printing facilities to improve efficiency and reduce cost).

Unlock value of landbank. Star Media Group has 19 lands at a net book value of RM158.7m, which has not been revalued for a long time. The group is assessing the best use of each land and highlighted that there are plans to diversify away from its core business. We do not discount the possibility for the company to venture into (i) Real Estate Investment Trust (REIT) or (ii) property development.

Despite improved consumer sentiment, adex did not rebound. Adex remained weak in 2Q, despite supported by positive events such as GE14 and World Cup. This has alarmed us that the market sentiment had turned cautious on spending. Hence moving into 2H18, we do not see any catalyst for the following quarters (Q3 and Q4) and opine that the cost saving measures may not be strong enough to cushion the falling revenue.

Yield no longer attractive. As the group is seeking for potential M&A, we opine that it may choose to preserve cash. Hence, we turn more conservative on their payout; we are expecting a DPS of 6 sen for FY18-20.

The group has to look for a new direction. Traditional media continues to face the digital disruption. Outlook of the company remains subdued with challenges from the declining newspaper circulation, weak consumer sentiment and economic uncertainties. We see Star’s earnings being affected by cautious adex coupled with the loss of Cityneon’s contribution to the event segment. As such, we do not see a potential growth catalyst moving forward.

Forecast. We reduce our DPS expectation to 6 sen from 9 sen for FY18-20.

Upgrade from Sell to HOLD with a higher TP of RM1.00 (previously RM0.91), based on 1.0x FY19 P/NTA. After our SELL call on 20th August share price has revised downwards by 18%, hence our upgrade to HOLD.

Source: Hong Leong Investment Bank Research - 27 Aug 2018