We attended STAR’s post-4Q13 results briefing yesterday. The key highlights of the briefing focused on: (i) the company’s e-paper strategies, (ii) the upcoming regional e-paper bundled service, and (iii) an update on its existing businesses. STAR is reiterating its intentions to maintain an annual DPS of 15.0 sen-18.0 sen should the group manage to achieve a FY14 net profit which is similar to the prior year. Meanwhile, STAR is optimistic on its upcoming regional e-paper bundled service, which could provide a new income source for its adex revenue in the future, if successful. On top of that, the group also expects its e-paper subscribers to continue to increase, which could lead to cost saving through lower newsprint consumption going forward. There are no changes to our FY14-FY15 estimates. We reiterate our UNDERPERFORM call on STAR with an unchanged target price of RM2.05, based on a targeted FY14 PER of 13.0x (-1.5x SD).

Aiming to sustain its DPS in FY14. Star is aiming to reward its shareholders by paying 15.0sen-18.0sen DPS should the FY14 net profit is maintained at FY13 level (~RM143m). Bloomberg data showed that consensus is expecting the group to record RM146m net profit and pay 15.8 sen DPS in FY14. We, however, are taking a cautious view and expect the group to record a net profit of RM117m in FY14, no thanks to its voluntary separation scheme (VSS), which could lead to short-term pain but long-term gain. The group has approved 60 (out of the 259 applications) employees VSS schemes, which cost RM12m in 1Q14. On the bright side, it will enjoy RM5m cost saving per annum going forward. Meanwhile, the group is also aiming to retrench another 40 staffs over the next few months by compensating c.RM10m. Despite our lower net profit estimate (as opposed to the consensus figure), we maintained our DPS forecast of 15.0 sen in FY14.

Gloomy adex outlook. Star indicated that advertisers are still taking a cautious stand over the past two months amid the rising cost environment. Management expects the annual adex growth rate to record low-to-mid single digit despite the events laden 2014. We concur as any feel-good factor could potentially be dampened by the on-going subsidy rationalization despite the two major events this year, namely FIFA World Cup and Visit Malaysia Year as highlighted by us in earlier reports. We are keeping our total gross adex growth forecast unchanged at +6.8% YoY (or +2.9% after stripping off the Pay-TV segment contribution) in CY14.

Star’s e-paper continues to gain traction. Star has introduced its e-paper bundled packages since April 2012. The nearly two years old e-paper has continued gaining traction with subscribers climbing to >49k in 1HCY13 in contrast to c. 42k in 2HCY12, according to the latest Audit Bureau of Circulation's data. The improvement has raised management confidence on the segment which is aiming to achieve 80k subscription by 1HCY14 through different marketing approaches. With the expected higher e-paper subscriptions, management believes it could achieve cost saving through lower newsprint consumption going forward.

Regional e-paper bundled service targeted to launch in 1Q14. To further leverage on its digital print media platform, the group has tied-up with several regional media players such as The Nation (Bangkok daily English newspaper), Jakarta Post and Philippine Daily Inquire and targeting to launch its maiden epaper regional bundled service by end-March. While the pricing details have yet to be unveiled, we understand that a Star e-paper subscriber will only need to pay a reasonable rate to gain access to both local news as well as regional news. No financial guidance was provided, but management believes this service could attract regional players (i.e. airlines and banks) and thus provide growth opportunities for adex, going forward. Thus far, the regional e-paper bundled service has attracted RM1m advertising revenue, according to the management.

Source: Kenanga