STAR’s 1Q16 results came in below expectations due to lower print segment’s turnover and thinner margin. No dividend was announced during the quarter, as expected. Post results review, we lowered our FY16E/FY17E earnings by 9.4%/6.5% on: (i) lower print segment turnover (on the back of lower adspend revenue), and (ii) higher OPEX assumptions. Maintain MARKET PERFORM but lowered TP to RM2.37 (from RM2.41, previously) after rolling over the valuation base year to FY17E with targeted PER of 13.7x, representing an unchanged -1.0x SD below the 5- year mean.

Below expectation. STAR’s core 1Q16 NP of RM15.5 (-42% YoY) came in below expectations, accounting for 11.8% of our, and 12.2% of the street’s, full-year estimate. Note that the group’s 1Q normally made up c.16%-22% of the full-year NP, based on the past five-year financial performance. The weaker-than-expected 1Q16 result was mainly attributed to: (i) the lower print segment’s turnover (-12.7% YoY) due to softer advert revenue, and (ii) lower print and radio segments’ margin as a result of higher fixed & operating costs.

No dividend was declared during the quarter, as expected. For the full financial year, we expect STAR to declare lower DPS of 15.0 sen (vs. 18.0 sen previously), implying a dividend payout ratio of 93%, which translates into a dividend yield of 6.3%. YoY, 1Q16 revenue dived by 9% to RM199m due to lower revenue from all segments, in particular, the print division, no thanks to the lower advertising revenue. PBT, meanwhile, tumbled by 40.5% despite a single-digit drop in its turnover. The weaker-than-expected PBT was mainly led by thinner print and radio segments’ margin. In tandem with the weak PBT, the group’s reported PATAMI deteriorated by 41.7% to RM15.5m in 1Q16.

Print and Digital revenue contracted by 13% to RM142m due to lower adex revenue amid economic uncertainties, and poor consumer sentiment, which affected the overall adex negatively. The segment’s PBT, meanwhile, dipped by 39% to RM27m, no thanks to the persistently higher fixed & operating expenses. Radio broadcasting segment’s revenue, meanwhile, declined by 7%. Poor sentiment and the sluggish economy have affected the airtime revenue and resulted in LBT of RM0.36m vs. PBT of 0.77m in 1Q15.

Television division’s revenue fell by 29% and continued to suffer a LBT due to higher direct cost. On the other hand, Event division’s revenue advanced by 10% as a result of higher interior projects completed by Cityneon but continued to suffer a LBT of RM1.8m, although the losses have narrowed from RM5.3m a year ago. QoQ, 1Q16 turnover tumbled by 29% as a result of the seasonal factor and lower print adex and Event segment’s revenue. The continued cautious mode adopted by the general advertisers has led STAR’s PBT to fall 63% to RM22.4m.

Outlook. Our gloomy adex outlooks remained unchanged and believe the adex sentiments are still being overshadowed by: (i) the current rising cost of doing business, (ii) MYR fluctuation, and (iii) the weak consumer sentiment, in 1H16. Nevertheless, there is a chance for the adex sentiment to improve gradually moving towards 2H16, thanks to several adex-friendly sport events. STAR is expecting the country’s adspend to remain soft in FY16. Notwithstanding, STAR will continue to defend the Print segment whilst expanding other platforms (in particularly the event segment) and also continue its prudent cost management. 

Source: Kenanga Research - 25 May 2016