We attended STAR’s post-3Q15 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, especially the event division. The group reiterated its intention to keep its annual FY15 DPS target at 18.0 sen despite the uninspiring 9M15 results. Meanwhile, STAR remains hopeful on its event division and believes the recently secured exhibition rights could provide a buffer to its earnings. Post-briefing, there were no changes to our FY15-FY16 estimates. Our STAR’s target price remains unchanged at RM2.36, based on a targeted FY16E PER of 13.5x (-1.0x SD below its mean).

Maintained MARKET PERFORM for its decent dividend yield. Dividend aspirations. STAR is still targeting to sustain its DPS of 18.0 sen in FY15 (subject to the board and shareholders’ approvals) despite recording uninspiring 9M15 results where its core PBT dipped by 17.3% YoY to RM109.7m. The group has earlier highlighted it will sustain its DPS of 18.0 sen if the core PBT achieved a similar quantum as in the past two financial years (at c.RM190m). Nevertheless, in view of the lacklustre 9M15 results and challenging time ahead, we believe it will be a tall order for the group to achieve the full-year core PBT target. Having said that, STAR has a strong net cash pile of RM418m as of end- September, which could be used to fund its dividend payment if needed. Should STAR sustains its DPS of 18.0 sen in FY15, it implies a payout ratio of 111% of our and 114% of the street’s full-year core earnings estimates and would mark the first payout ratio that exceeds 100% since FY11. With no exceptional item expected to arise, market is targeting the group to achieve RM160m PBT in FY15 with a total annual DPS of 16.5 sen. We, however, are more conservative and expect the group to record only RM157m (due to lower revenue estimation in contrast to the consensus) with a lower DPS of 15.0 sen.

Challenging time ahead. STAR is turning more cautious on the adex outlook for both 4Q15 and CY16 in view of the softened economic environment, weaker Ringgit, and the prolonged poor consumer spending on the back of rising living cost. The diminished property launches and several protests that occurred in September have led advertisers scaling back adspend in 3Q15, where the group’s print advertising revenue dipped by 4.1% QoQ (or -7.0% YoY) to RM132m. On top of that, STAR also downplayed its digital media short-term prospects given the lacklustre adex revenue thus far. Having said that, management will continue to invest in the digital media (including content, mobile and video) as the future is moving towards the digital platform despite the long gestation period.

Forward strategies. STAR intends to leverage its content and media assets further (via AIM – audience targeting system) to enhance effectiveness and to provide creative advertisements. Meanwhile, STAR also plans to streamline its workforce (i.e. freeze hiring & terminate/impose a pay-cut on contract staffs) to lower its operating costs.

Events expansion. Cityneon (51.1% owned by STAR) is planning to phase out its low-margin interior architecture business progressively with an aim to expand its exhibition services and event management segments further following the securement of rights to provide exhibition services for the famous Marvel characters and the recent global rights to display the Transformer characters. While STAR remains hopeful on these latest developments, it is reluctant to share any expectation and financial guidance but believes these deals could provide positive earnings contributions to Cityneon in contrast to the current loss making status. Note that, Cityneon has turned in LBT of S$1.8m in 9M15 (1H14: S$50k) despite recording 30% YoY (to S$64.5m) jump in revenue.

Source: Kenanga Research - 25 Nov 2015