News

STAR’s 64.1%-owned subsidiary Cityneon Holdings Ltd has entered into an S&P agreement with Philadelphia Investments Ltd to acquire the entire share capital of Victory Hill Exhibitions Pte. Ltd for SGD21.0m, to be financed by a combination of cash and shares.

The deal will allow Cityneon to hold the rights to operate, market and promote famous marvel characters (i.e. the Hulk, Iron Man and etc.) for display in museums and science centres or similar venues.

The purchase consideration will consist of SGD10.0m in cash and the issuance of 45.0m new shares at SGD 20 sen per share.

A deferred payment of SGD2.0m and a series of variable incentive payments will be payable upon Victory Hill achieving certain profits targets by June 30 in the 2016-2018 period.

To partial fund the purchase consideration, Cityneon is proposing a 1-for-1 rights issue at an exercise price of SGD 18 sen per share, representing a 30.8% discount to Cityneon’s share price as at the closing of trading on April 1, 2015. The exercise is expected to raise SGD10.2m-SGD15.9m, of which SGD10.0m will be used to fund the acquisition while the balance will be used for working capital and estimated expenses (c.SGD0.8m).

Management cited that the rationales for the acquisition are: (i) additional source of revenue and diversification of business and geographical risks, and (ii) good synergies and enhanced fund-raising capabilities.

Comments

The acquisition appears fair based on the independent valuer Ernst & Young Solutions, which value Victory Hill at SGD21.1m to SGD25.2m.

We understand that STAR intends to subscribe all its rights entitlement, suggesting that the group would need to spend SGD10.2m (or RM27.6m @ SGD1=RM2.70) for the rights subscription. Funding is not an issue, in our view, given its RM352m net cash position as of end-FY14.

STAR’s equity stake in Cityneon, however, is expected to be diluted to 51.1% from the current 64.1% followed the completion of the acquisition.

Victory Hill was only recently incorporated in December-2014, thus, we do not expect any material earnings impact to be made in the near term due to the usual 3-5 year gestation period.

Outlook

Our view on the industry adex outlook remains unchanged where we believe the adex sentiments are still being overshadowed by: (i) the current rising cost of living, and (ii) the GST impact. Nevertheless, we believe there is a fair chance for the ad-spend to improve in March due to the pre-GST fever but is expected to be soften thereafter.

Its event division contribution, meanwhile, remains a wildcard to the group’s earnings

Forecast

No change in our FY15-FY16 earnings estimate.

Rating

Maintain UNDERPERFORM due to the lack of earnings catalyst and limited capital upside from here.

Having said that, its high dividend yield could provide some cushions to its share price.

Valuation

Maintain our TP at RM2.26 based on a targeted FY15 PER of 11.8x, representing -2.0x SD below its mean.

Risks to Our Call

Improvement in adex sentiment.

Source: Kenanga Research - 3 Apr 2015