Investment Highlights

• We reiterate our BUY recommendation on Star Media Group (Star) with unchanged forecasts and fair value of RM1.80/share based on sum-of-parts valuation.

• Star's 1QFY18 core PAT from continuing operations came within expectations at RM11.4mil, surging more than 4x YoY and reversing a loss registered in the last quarter. The profit accounted for 26% of our full-year forecast and 25% of consensus estimate.

• The sharp recovery was mainly attributed to the group’s PBT margin expanding from 5.4% in 1QFY17 to 16.1% in 1QFY18. This is due to the cessation of Li TV operations, lower depreciation expenses from the print segment (because of a smaller asset base after impairments) and a mutual separation scheme/early retirement option (MSS/ERO) exercise which reduced its headcount by some 250 employees.

• On the flipside, the group’s 1QFY18 revenue declined 8% YoY and 14% QoQ, dragged by its broadcasting (radio), print and digital segments as advertisers remained cautious.

• In the event and exhibition division, however, revenue was up significantly both QoQ (124%) and YoY (179%) due to more events and campaigns. As a result, the division has swung from a LBT of RM0.1mil in 1QFY17 to a PBT of RM2.7mil in 1QFY18. Sequentially, the division’s PBT was 4x higher.

• Going into 2Q, we believe the group will see slight pickup in adex on the back of increased campaign advertising for the general election and the 2018 FIFA World Cup. In the past two FIFA World Cup events, Star's 2Q revenue expanded 9-26% YoY as corporations advertised ahead of the games. In addition, we have gathered from our channel checks that FMCG players are getting more aggressive on promotional activities this year, which bodes well for the company’s adex revenue.

• On a separate note, Star announced that its wholly-owned Impian Ikon has entered into a share sale agreement with Leaderonomics Capital (LCSB) to dispose of a 51% stake in Leaderonomics (LSB) for a total cash consideration of RM5.65mil. Upon completion of the disposal, LSB and LSB’s subsidiaries will cease to be subsidiaries of Star. The principal business activity of LSB is the provision of human capital development services including training and consultancy. The estimated gain on the disposal is circa RM3.37mil.

• Overall, while digitalisation continues to pose a threat to newspaper circulation, we believe Star’s earnings are set to recover given a series of restructuring exercises concluded last year. These include MSS/ERO exercise, asset impairments and the cessation of Li TV operations. Collectively, we estimate that the group would reap savings of RM30-40mil/year from the restructuring exercises. In addition, the company offers good value with a net cash per share of RM0.44 (44% of current price) and a price-to-book (P/B) of 0.88x, which is below its 3-year average P/B of 1.25x. Dividend yield is also attractive at 6%.