- We re-affirm our HOLD recommendation on Star Publications, with a lower fair value of RM3.10/share vs. RM3.48/share previously, based on a 10% discount to our DCF ' following the fine-tuning our earnings assumptions after the release of its 3Q results.

- Star's 9MFY12 net profit of RM111mil was below expectations, accounting for only 60% and 62% of our and consensus estimates, respectively, due to lower advertising revenue. Note that in August, newspaper adex fell by 1.9% YoY. English-language newspaper segment contracted by 7.3% YoY, while that for Malay-language newspapers grew by 3.9% YoY.

- As such, we have trimmed our FY12F-FY15F net profits by 13%-20%, given the slower adex growth due to a cautious sentiment and rising competition from Malay-language newspapers. We forecast a flat adex growth for FY12F and marginal 1% rise for FY14F-FY15F. We have also incorporated the contributions from the newly-acquired event business by I. Star Ideas Factory, with a PBT assumption of RM5mil for FY12F and circa RM10mil-RM15mil for FY13F-FY14F. Our revised net profit forecasts for FY12F-FY15F are below consensus by circa 16%-18%.

- Star's 3QFY12 revenue fell 14%, driving net profit down by 23% QoQ to RM34mil, apart from higher operating expenses in promotions and discounts to launch the e-bundle offering as well as marginally higher finance costs. Print commanded 74% of revenue, falling by 2.7% QoQ because of lower adex. Only the print and events segment contributed positively to the bottom line. Stripping out PBT from Perfect Livin' (recently-acquired event business), Cityneon is still loss- making due to higher operating expenses. 

- The impending General Election, which will act as a key booster to adex, is unlikely to be held this year. As such, we believe companies are likely to remain a bit cautious about ad spend. Nonetheless, we expect ad spend to gain momentum as advertisers tend to exhaust their budget towards the year-end, underpinned by the final stretch to bring in revenue. Therefore, we expect 4Q to be seasonally stronger and robust.

- We still view Star's earnings prospects as challenging given the losses from the recently-acquired media assets in FY11 ' Catcha Media, Capital FM, Li-TV and Red Tomato. Earnings are expected to  remain under pressure for at least three years' of gestation period. 

- Despite higher operating expenses of circa RM6mil,  as guided by management, arising from its investments (four media assets, ePaper, iSnap and eFlavours), management is confident of sustaining a DPS of 18.0 sen. This translates into an attractive dividend yield of 6%, supported by a strong cash position of RM493 as at end-3QFY12 ' at parity to Media Chinese's 6% (excluding special dividend) and higher than Media Prima's 4.5%.

- Underpinned by the challenging outlook and earnings volatility for Star, we maintain our HOLD recommendation. Furthermore, the group lacks near-term re-rating catalysts at this point. The stock is currently trading at 14x FY12F PE ' at near parity to its historical 3-year average PE of 15x.  

Source: AmeSecurities