We attended STAR’s post-3Q14 results briefing last Friday. The key highlights of the briefing focused on: (i) an update on its existing businesses, (ii) dividend, (iii) adex outlook, (iv) cost control initiatives, and (v) forward business strategies. The group has lowered its annual FY14 DPS target to 15.0 sen (from 18.0 sen previously) and aiming to achieve a similar quantum in FY15. Meanwhile, the group is continuing its cost controls initiatives, where focus will be on: (i) scaling down its Sarawak operations progressively, (ii) evaluating the usage of 42 gsm newsprint, and (iii) rationalization of loss-making segments. Post briefing, there are no changes to our FY14-FY15 estimates. Our STAR target price remains unchanged at RM2.29, based on a targeted FY15 PER of 11.7x (-2.0x SD below its mean). Its stock rating, however, raised to MARKET PERFORM in view of its decent DPS of 15.0 sen, which implied a 6.6% dividend yield. Lowering targeted FY14 DPS to 15.0 sen (from 18.0 sen previously).

STAR has lowered its FY14 DPS target to 15.0 sen (from 18.0 sen guidance in 2Q14) in view of its uninspiring 9M14 report card and challenging adex outlook ahead. Moving into FY15, the group is also targeting to achieve a similar quantum akin to FY14 and cited that anything above 15.0 sen DPS is unlikely for now. Although the group has recorded net cash of RM354m and RM381m in its reserve, STAR has downplayed the likelihood of returning excess cash to shareholders in view of its cash preservation approach to prepare for future acquisitions. There is no change in our FY14-FY15 DPS forecasts given that we had earlier estimated the group to reward shareholders with 15.0 sen DPS in both financial years.

Cost-control initiatives continue. After completing the VSS scheme (approved 60+ out of the 259 applications and costing RM11.5m) in 1H14, management expects to save c.RM5.5m p.a. in labour cost moving forward. The group, meanwhile, also decided to scale down its Sarawak operations progressively (from 10k copies/day to 3k) given the unit is currently incurring RM3m-5m loss per annum. Besides, it also in the midst of evaluating the use of 42 gsm newsprint instead of the traditional 45 gsm (which could yield 6% higher in terms of the production but incurring 5%-10% higher 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 45gsm newsprint inventory of 9-month. Management indicated that for every USD10/MT drop in newsprint price, the group could save c.RM2m in its operating costs. On top of that, the group also intends to rationalise its loss-making segments, where STAR had recently ceased publications and disposed off Red Tomato and Shangai magazine.

Forward strategies include: (i) continued commitment in cost-control and rationalisation initiatives, (ii) strengthening print and investing in digital platform, (iii) assessment of video media to garner the largest share of adex, where we understand that the group recently talked to MyTV for digital TV broadcast and is currently evaluating (where the decision will be made in 6-month time) to either explore TV channel distribution and/or content's development, and (iv) focusing on turning the radio segment around.

Adex outlook remains challenging. While the general adex outlook remains weak and could continue to be so in 2015, management continues to believe that the country’s adex may likely be trending upwards in 1Q15 prior to GST implementation. Meanwhile, despite the challenging adex outlook, STAR would still likely benefit from its dominant position in the English newspaper segment given that ad spends are now focused on the segment leader rather than the trailing laggards.

Source: Kenanga