Star’s 1H17 core net profit of RM15m came in below our and consensus expectations. The variance was mainly due to lower contribution from the print and Cityneon divisions, as advertisers remained cautious on their ad spending given poor consumer and business sentiments. A surprise DPS of 36 sen has been proposed in 1H17 (1H16: 9 sen). We have cut our 2017-19E EPS forecasts by 33- 48% to account for the weak 1H17 results, completion on disposal of Cityneon and cessation of Li TV. Maintain SELL call on Star with a new TP of RM1.41.

1H17 Core Earnings Down 62% Yoy, Below Expectations

Star reported a decline in 1H17 revenue by 19.5% yoy to RM260.5m, mainly attributable 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 weak market sentiment. Star’s revenue contribution from print & digital, radio broadcasting and event & exhibition divisions declined by 20.9%, 4.7% and 26.3% yoy to RM225.5m, RM19.9m and RM5.8m respectively but partially offset by higher contribution from the TV division, which saw its revenue improve by 20.6% yoy to RM5.6m. 1H17 core net profit, after excluding one-off items, declined by 62% yoy to RM15m. This was below both our previous and consensus expectations, accounting for 20% and 22% of 2017E forecasts, respectively. The variance was mainly due to lower-thanexpected contribution from the print and Cityneon divisions.

DPS Surprise in 2Q17

Star has proposed a higher 1H17 DPS of 36 sen (1H16: 9 sen) - above expectations. We believe that the company is returning excess cash to shareholders with the surprise dividend announcement, which largely arises from the gain on disposal of Cityneon.

Cutting 2017-19E Earnings

We cut our 2017-19E EPS by 33-48%, mainly to account for: 1) weak 1H17 results; 2) completion on disposal of Cityneon; 3) cessation of Li TV. The gain arising from the disposal of Cityneon of about RM208m (after excluding expenses related to the disposal) is likely to be recognized in 3Q17. We have also cut the DPS for 2018-19E by 56-59% to reflect the lower earnings (assumed 100% payout).

Maintain SELL Rating But With a Lower Target Price of RM1.41

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. The DPS surprise also does not bode well in our view, as it suggests limited near investment opportunities to replace the profitable Cityneon business. Our target price on Star is revised lower to RM1.41 (from RM1.96), based on 19x PER (current 1SD below 3-year average mean from 15x previously) to our 2018E EPS. 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 - 22 Aug 2017