Weak Start to the Year, Below Expectations

Star’s 1Q17 core net profit of RM6.6m came in below expectations. The variance was mainly due to lower contribution from the print division, as advertisers remained cautious on their ad spending given the poor consumer and business sentiment. We cut our 2017-19E EPS forecasts by 6-16% to account for the weak 1Q17 results. Maintain SELL call on Star with a new TP of RM1.96.

1Q17 Core Earnings Down 58.5% Yoy, Below Expectations

Star’s 1Q17 revenue declined by 7.9% yoy to RM183.1m, mainly due to lower advertising revenue caused by the ongoing challenges in the media industry with the shift to digital media as well as advertisers remaining cautious on their ad spending due to the poor market sentiment. Star’s revenue contribution from print & digital and radio broadcasting divisions declined by 19.5% and 9.5% yoy, respectively to RM114.2m and RM9.9m but partially offset by higher contribution from the event management and TV divisions, which saw their revenue rising by 28.8% and 66% yoy, respectively to RM54.1m and RM3.4m. 1Q17 core net profit, after excluding one-off items, declined by 58.5% yoy to RM6.6m. This was below both our previous and consensus expectations, accounting for 7.5% and 7.6% of 2017E forecasts, respectively. The variance was mainly due to lower-than-expected contribution from the print division.

Maintain SELL Rating With a New Target Price at RM1.96

We cut our 2017-19E EPS by 6-16% in view of the weak 1Q17 results. We remain cautious on Star because of: 1) the ongoing, challenging outlook for the media industry with adex potentially affected in the quarters ahead from continued uncertainties in the market coupled with poor business and consumer sentiment; 2) it being adversely affected by the shift in adex revenue towards the broadcast segment from print; and 3) negative effects on hard-copy circulation due to the continual shift in reader preferences to reading on mobile devices or over the Internet. Our target price on Star has been revised to RM1.96 (from RM1.70), based on 15x PER (current 1SD below 3-year mean; previously 14x) and as we roll forward our valuation basis to 2018E. Maintain our SELL call on the stock.

Key Risks

Key upside risks to our call include a sharp rebound in adex revenue, a substantial improvement in hard-copy newspaper circulation and a much higher-than-expected earnings contribution from the non-print segment.

Source: Affin Hwang Research - 24 May 2017