We attended STAR’s post-2Q14 results briefing yesterday. The key highlights of the briefing focused on: (i) dividend, (ii) adex outlook, (iii) cost controls initiatives, (iv) strategies beyond 1H14 and (iv) an update on its existing businesses. STAR has raised its intentions to reward shareholders with an annual DPS of 18.0 sen should the group manage to achieve FY14 reported net profit at a level similar to the prior year. There are no changes to our FY14-FY15 estimates. We reiterate our UNDERPERFORM call on STAR with an unchanged target price of RM2.44, based on a targeted FY15 PER of 12.1x (-2.0x SD).

Raising FY14 DPS target to 18.0 sen. STAR is aiming to reward its shareholders by paying 18.0 sen DPS (up from 15.0 sen previously) should the FY14 reported net profit is maintained at FY13 level (~RM143m). The group has recorded a net profit of RM55.6m (+2% YoY) in 1H14, thus suggesting that its 2H14 is expected to come in at c.RM87m, which we believe is a challenging target to achieve. We expect the group’s FY14 net profit to come in lower at RM117m (vs. RM141m that estimated by consensus), due to the employees' VSS schemes (which incurred RM11.5m expenses in 1H14) as well as the gloomy adex outlook moving forward. Thus, there is no change in our 15.0 sen DPS estimate, albeit we acknowledge that the group has a capability to reward more due to its strong net cash of RM293m as of end-2Q14.

Gloomy adex outlook in August amid MH17 tragedy. The spill-over effect of the MH17 tragedy, which happened on 17 July 2014, is expected to linger in August, judging from the persistent low-profile/cancellation of Hari Raya open house celebrations by both the corporate as well as the government agencies. Meanwhile, we understand that the traditional National Day celebrations will also be toned down this year as a mark of respect to MH17 and MH370, thus suggesting lower ads spend moving forward. STAR’s gross newspaper adex has lowered to RM92.2m (-12.3% QoQ; -3.8% YoY) in July, according to Nielsen’s data. Management believes its 3Q14 print adex is likely to come in lower on a year-on-year basis amid challenging economic and business environment.

Priority's tasks beyond the 1H14 includes (i) continues commitment on ongoing cost control and rationalisation initiatives, (ii) strengthening print and investing in digital, (iii) expanding TV presence, and (iv) strategic investments in other high growth areas.

Cost controls initiatives. The group has completed its VSS schemes (approved 60+ out of the 259 applications) in 1H14, which cost RM11.5m and expect to enjoy c.RM5.5m p.a. cost saving moving forward. On top of that, STAR also considers scaling down its Sarawak operations, which currently incurred RM3m-5m loss per annum. Besides, it also evaluating the use of 42 gsm newsprint instead of the traditional 45 gsm (which could yield 5% higher in terms of the production but suffered 5%-10% higher in purchasing price) and import the newsprints from Asean countries to save a 10% on import duty. We opine the impact of the cost saving from its newsprint, if any; will not be extensive in the near term, judging from its hefty newsprint inventory, which stood at c.11-month with an average price of USD610-USD620/MT at end-1Q14.

2Q14 print adex boosted by wrap and FMCG advertisements. STAR’s net print adex revenue (+4.5% YoY; 18.5% QoQ to RM163m) has showed an encourage improvement in 2Q14, thanks to the higher contribution from both the wrapping advertisements as well as A&Ps spent by FMCG players (especially Nestle). The auto and property ads, meanwhile, also remain resilient during the quarter. The trend, however, is not expected to continue in 3Q14 in view of the gloomy adex outlook.

Source: Kenanga