We attended STAR’s post-1Q15 results’ briefing yesterday. The key highlights of the briefing focused on: (i) dividend, (ii) adex outlook, (iii) forward business strategies, and (iv) an update on its existing businesses. The group intends to keep its annual FY15 DPS target at 18.0 sen should its normalised PBT is maintained at c.RM190m level. Adex outlook remains challenging as a result of the GST impact but is expected to stabilise in 2H15. Postbriefing, there are no changes to our FY15-FY16 estimates except the FY15 DPS forecast, which is lowered to 15.0 sen (from 18.0 sen previously). Our STAR’s target price remains unchanged at RM2.49, based on a targeted FY15E PER of 13.3x (-1.0x SD below its mean).

FY15 DPS likely to stay at 18.0 sen if the core PBT is maintained at c.RM190m. STAR intends to sustain its DPS of 18.0 sen in FY15 should the core PBT achieved a similar quantum as for the past two financial years. STAR distributed an annual DPS of 18.0 sen and 15.0 sen in FY14 and FY13, respectively, representing c.57.5%-69.6% payout on its core PBT. With no exceptional item expected to arise, market is targeting the group to achieve RM197.5m PBT in FY15 with a total annual DPS of 17.7 sen. We, however, are more conservative and expect the group to record RM180m (due to lower revenue estimation in contrast to the consensus). Thus, we are lowering our FY15E DPS to 15.0 sen (from 18.0 sen previously), representing c.62% payout on its FY15E core PBT. Our FY16E annual DPS remains stay at 18.0 sen.

Adex outlook remains challenging. While the general adex outlook remains weak as a result of cautious spending by consumers due to GST, management expects spending patterns to normalise in 2H15. STAR indicated that its April 15 adex is relatively low and may continue to remain challenging in the next two months before the possibility of a recovery or normalisation in 3Q15.

Forward strategies include: (i) verticalisation of business units through rebuilding its core assets, which include verticalisation of its advertising business, expansion & revitalisation of events business, and disrupting online advertising with Audience Interest Marketing (“A.I.M.”) strategy, (ii) digital transformation, where the group plans to transmute its news to video as well as to build its group content into video before developing its footprint across ASEAN, and (iii) strategic and synergistic acquisitions.

Transforming its future to video through leveraging on its core consumers across the entire STAR Media group’s audiences. The group is planning to launch its revamped online advertising in June that is powered by its in-house audience targeting system called A.I.M., which allowed advertisers to promote their products to specific consumer groups that are segmented based on their interest, behaviour and demographic profiles. Management believes video broadcasting is the right direction moving forward. Nevertheless, this segment is unlikely to contribute positively in the immediate term. Capex is expected to be minimal as the portal was revamped from its existing Swithchup TV gateway.

Update on the “Marvel-lous” deal. STAR’s 64.1%-owned subsidiary Cityneon Holdings Ltd has secured the rights to provide exhibition services for the famous Marvel characters in a S$21m deal in April. While the current exhibition right is only limited for North America market, the group is in talks to extend its coverage to Korea and Singapore. With the profit guarantee of S$2.8m for the first year of acquisition, STAR expects positive Cityneon’s earnings in FY15. Note that, Cityneon has slipped into the red in 1Q15 with LBT of RM5.3m despite its revenue advancing by 23% YoY as a result of the higher OPEX and lower profit margin. 

Source: Kenanga Research - 26 May 2015