We attended STAR’s post-1Q14 results briefing yesterday. The key highlights of the briefing focused on: (i) e-paper update and strategies, (ii) adex outlook, and (iii) an update on its existing businesses. STAR reiterated its intentions to maintain an annual DPS of 15.0 sen should the group manage to achieve FY14 net profit at a level similar to the prior year. Meanwhile, the group 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 FY15-FY16 estimates. We reiterate our UNDERPERFORM call on STAR with an unchanged target price of RM2.37, based on a targeted FY15 PER of 12.1x (-2.0x SD).

Targeted to declare 15.0 sen DPS in FY14. Despite a poor 1Q14 result, STAR remains hopeful to reward its shareholders by paying 15.0 sen DPS should the FY14 net profit is maintained at FY13 level (~RM143m). Bloomberg data showed that consensus is expecting the group to record RM139m net profit and pay 15.3sen DPS in FY14. We, however, are taking a cautious view and expect the group to record a net profit of RM113m 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 RM9.6m in 1Q14. On the bright side, it will enjoy c.RM5.3m cost saving per annum going forward. 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. The MH370 incident has dented the local advertising market noticeably in 1QCY14, especially the newspaper segment. Nevertheless, management believes the adex spending will gradually improve henceforth until the year-end, barring any unforeseen circumstances, given adex spending momentum has resumed since May. Management believes the overall adex should remain buoyant but expect the newspaper segment’s adex to come in lower on a year-on-year basis (CY13: 6.2% YoY). Despite the positive adex outlook painted by the management, we believe, the on-going subsidy rationalisations will continue to weigh on consumer sentiment and causing advertisers to adopt a cautious mode.

Eyeing another digital platform? STAR is still planning to expand its reach media portfolio and believes the next M&A could be come from the digital media. While management is reluctant to further elaborate on the subject, we understand that it has allocated a maximum RM10m for each M&A.

Aggressive mode in Property and Education segments. STAR is planning to adopt a more aggressive mode in the Property segment in FY14 by organising five property fairs as compared to two in the prior year. Similarly, the group also planned to raise its education exhibition to four from two a year ago. By taking a more aggressive approach, management believes it can lure more advertisement revenue from these two segments.

STAR’s ePaper continues to gain traction. STAR’s ePaper bundled package (Print + ePaper + eflavours) continued gaining traction with subscribers climbing to c.80k currently (vs. c. 49k in 1H13), and expect to hit 100k mark by end-3Q14. The encouraging take-up rate in its ePaper was mainly led by its (i) attractive bundle price (RM360/year vs. RM460/year for print version only), (ii) better distribution channels, and (iii) collaboration with YTL-YES. The pure ePaper subscribers, however, merely stood at 3k, due to its unattractive pricing structure (RM350/year).

Source: Kenanga