Star’s 1H18 core net profit of RM13.2m (-13% yoy) came in below our and consensus expectations. The variance to our forecast was mainly due to lower-than-expected ad spending and higher losses from Star’s OTT venture. The momentum in ad spending weakened after Malaysia’s 14th General Election (GE) while the market turned more cautious despite positive events such as the World Cup. As such, we cut our 2018-20E EPS by 21-27% mainly to account for the weak 1H18 results. We downgrade Star to a SELL with a lower TP of RM0.88, based on a 15x PER applied to our 2019E core EPS.

1H18 Core Earnings Down 13% Yoy, Below Expectations

Star’s 1H18 revenue showed a decline of 11.6% yoy to RM208.5m, mainly attributable to the lower print & digital and radio division’s revenue. 1H18 revenue contribution from its print & digital, and radio broadcasting divisions fell to RM177.5m (-13% yoy) and RM15.3m (-12% yoy) respectively, but was partially offset by a higher contribution from the event & exhibition division by 66% yoy to RM9.6m. Star’s PBT in 1H18 increased to RM19.8m (>100% yoy) despite the decline in revenue, mainly attributable to cost savings arising from the impairment of printing assets and MSS in 2017. Nevertheless, after excluding for one-off items, Star’s 1H18 core earnings declined by 12.6% yoy to RM13.2m. This is below our and consensus expectations, accounting for only 24.5% and 28% of full year forecasts, respectively. The variance to our forecast was mainly due to lower-than-expected ad spending as well as higher-than-expected losses from Star’s OTT venture (dimsum.my).

Cutting Our 2018-20E Earnings, Downgrading Star to SELL

We cut our 2018-20E EPS by 21-27%, mainly to account for the weak 1H18 results. We lower our 12-month TP to RM0.88 (from RM0.97), now based on a 15x PER (unchanged 2SD below its 3-year average mean, from 13x) on our 2019E core EPS and downgrade Star to a SELL (from Hold). We remain cautious on Star because of: 1) the ongoing challenging outlook for the media industry; 2) Star 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.

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 - 20 Aug 2018