We attended STAR’s familiarisation trip yesterday and walked away with a neutral view. About twenty fund managers and analysts attended the full-day plant tour in which management shared its latest update, strategies as well as processing flow on both the Print and the Radio divisions. Adex wise, its August adex is expected to come in lower (in terms of both YoY and MoM basis) amid the MH17 tragedy. 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).

Print segment. STAR is targeting to complete its system upgrading plan for its two printing machines (out of the four production lines located in Bukit Jelutong) by year-end. Upon the completion, the group expects its production efficiency to be improved given that the new system provides STAR not only with an auto colour register function machine but also the option of printing its papers by using 42 gsm newsprint instead of the traditional 45 gsm (which could yield 5% higher in terms of the production but paying 5%-10% higher in purchasing price). Moving forward, on top of its RM10m-RM20m annual maintenance capex, STAR is planning to spend another c.RM50m in total during the CY16-CY18 period to upgrade its mailing equipment to fullyautomated inserting system. Newsprint-wise, STAR is currently holding 9-12 months inventory with an average cost of c.USD620-630/MT. Although the current newsprint price is trading at c.USD570/MT, management does not intend to hold more than 12-month inventory in view of the current stable newsprint price environment. The recent abolishment of newsprint antidumping policy from five countries (Canada, Indonesia, South Korea, the Philippines and the U.S.) may provide some downwards pressures to the domestic newsprint price, thus benefiting the industry incumbents.

Radio segment. STAR indicated that the country’s radio industry achieved 93% weekly listenership in end-4Q13 according to the survey prepared by Nielsen and MCMC. The strong weekly listenership was mainly contributed by BM stations (+46% YoY to 7.4m listeners) and Chinese stations (+4% YoY to 3.35m listeners) but partially offset by the lower reach in the English stations (-37% YoY to 1.35m listeners). Despite the industry facing various challenges ahead (i.e. FM frequency; live streaming; application download), STAR believes its radio division (which consist of 988, Suria, Red FM, and Capital FM that ranked top 10 radio stations in their respective languages) can sail through the challenging wave in view of its strong presence in the industry. Management has set to increase its radio adex by addressing high-value underserved market segments as its short-term goal (CY14-CY15) while aiming to achieve the following targets, namely: (i) continue to increase/maintain its radio adex, (ii) grow digital engagement platforms, (iii) grow site traffic & page views of digital assets, and (iv) aggressive monetisation of digital assets, during the medium-term (CY15-CY17). As of 1H14, the group’s radio division contributed RM25.1m (+1.7% YoY) revenue or 5.2% to the group’s total turnover of RM486m. Its LBT, meanwhile, has narrowed to RM1.4m vs. RM3.5m a year ago.

August adex remains cloudy amid MH17 tragedy. The spill-over effect of the MH17 tragedy, which happened on 17 July 2014, has lingered to August as per our earlier expectation. Based on the preliminary data, STAR is expecting its August adex to come lower in terms of both YoY and MoM basis. Note that STAR’s gross newspaper adex has declined to RM92.2m (-12.3% MoM; -3.8% YoY) in July, according to Nielsen’s data. Apart from the MH17 tragedy, we believe the persistent low-profile/ cancellation of Hari Raya open house celebrations by both the corporates as well as the government agencies coupled with the relatively low-profile National Day celebrations also contributed to the cloudy adex mood in August. Moving forward, we believe the overall tepid consumer sentiment (as a result of the escalating cost of living spurred by the on-going subsidies’ rationalisation plan) will continue to cause the business sector to tighten their adex purse.

Source: Kenanga