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Star Publications - Valuation bottoming out BUY

kiasutrader
Publish date: Wed, 20 Feb 2013, 10:35 AM
kiasutrader
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- We are upgrading Star Publication to a BUY, with an unchanged fair value of RM3.10/share, based on our DCF valuation. Our fair value implies a potential return of 30% (including a 7% dividend yield) with a forward PE of 12x FY13F.

- The share price has retraced by a significant 35% and underperformed KLCI by 27%, since our downgrade on 8 July 2011. This was underpinned by a growing earnings risk profile of long gestation period given the acquisition of media assets in FY11. 

- Its FY12 results will be released on 26 February 2012. We expect weak results due to:- (1) Weaker print advertising revenue due to a shift from coloured to black and white advertising by hypermarkets coupled with additional incentives to vendors; and (2) Cost pressure on margins to build the TV and radio business.

- Overall, industry adex grew by 6%. English language newspaper adex slid by 5%, with Star contributing to an 8% fall. 

- Based on our projection, we estimate earnings to expand by 4% in FY13F. This incorporates contributions from I. Star Ideas Factory with a PBT assumption of RM10mil-RM15mil for FY13FFY14F. Earnings are anticipated to grow by 2% in FY14F given a turnaround of Cityneon at the operating level by end- FY13F.  Additionally, Li-TV and Capital FM are expected to break even.

- Meanwhile, cost pressure will stem from the radio business - Red FM and Suria FM for brand building. Capital FM will remain loss- making due to amortisation of licence. The estimated capex is at RM20mil, with no major upgrade in the printing press or system.

- Given the rising popularity of online advertising, the group is aggressively improving its online portal to capture losses from classifieds (-10% YoY). Furthermore, election jitters has slowed down MNC's advertising spend to-date. Management expects minimal earnings contributions (+<RM2mil) from the  general election.

- The outlook for newsprint prices is stable and it stands at US$616/MT currently. Star holds a 12-month newsprint inventory, purchased at >US$650/MT (excluding duties and freight charges). We envisage the group to only reap the benefits of  lower newsprint prices in 2HFY13.

- Star's current depressed share price has priced in its weaknesses. Despite that, Star offers an attractive dividend yield of 7.1% (>7% for the past three years). This is sustainable given an after-tax FCF yield of 12%. Furthermore, the group is supported by a strong balance sheet and cash pile of RM493mil as at end-9MFY12.

- More importantly, valuation is bottoming out. The stock is trading at 12x FY13F, at the trough level of its 5-year historical PE of 12x-26x. Hence, our BUY recommendation.  

Source: AmeSecurities
STAR (6084)
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