We attended STAR’s post-1Q16 results briefing yesterday. The key highlights of the briefing focused on: (i) dividend, (ii) adex outlook, and (iii) an update on its existing businesses. The group intend to keep its annual DPS target at 18.0 sen in FY16 should its core PBT stay at FY15 level. Meanwhile, STAR remains hopeful on its event division and believes the exhibition rights (held under Victory Hills Exhibitions Ptd Ltd) could provide buffer to its earnings. Postbriefing, there are no changes to our FY16-FY17 estimates. Our STAR’s target price remains unchanged at RM2.37, based on a targeted FY16E PER of 13.7x (-1.0x SD below the 5-year mean). Maintained MARKET PERFORM for its decent dividend yield.

Dividend ambition. STAR is aiming to maintain its DPS at 18.0 sen if the core PBT is sustained at the FY15 level (at c.RM170m). STAR distributed an annual DPS of 18.0 sen each in FY14 and FY15, representing c.95.2% and 99.9% payout, respectively. With no exceptional item expected to arise, the market is targeting the group to achieve RM157m PBT in FY16 with a total annual DPS of 16.6 sen. Similarly, we are also targeting a comparable PBT of RM160m with a total annual DPS of 15.0 sen in FY16. Having said that, despite lower dividend expectation (as compared to the management’s target), we do not foresee any difficulty for the group to reward 18.0 sen DPS to its shareholders in view of its hefty net cash pile of RM333m as of end-1Q16. Should this positive surprise materialise, it implies a dividend payout of 111%, marking the first dividend payout ratio that exceeds the 100% threshold in its history.

Adex outlook continued to remain challenging. The diminished property launches coupled with rising cost of doing business have led advertisers scaling back their adspend and dampened the group’s print advertising revenue to RM119m (-14.2% YoY) in 1Q16. Moving forward, STAR remains cautious on the adex outlook for CY16 in view of the softened economic environment, weaker Ringgit, and the prolonged poor consumer spending on the back of rising living cost. Although management expects a possible uptick in ad spends prior to Hari Raya/Euro Cup, the overall adex for the rest of the year is expected to be soft. Despite the challenging adex outlook, the group intends to continue enhancing its media platforms to extend their reach to wider audiences (by providing more bundled products and creative buys to advertisers) and expand aggressively into the digital space in video content (TheStarTV) and Audience Interest Marketing (AIM).

Events division updates. Despite a weak performance in 1Q16, STAR remains hopeful to see a positive earnings contribution from Cityneon (a 52.6%-owned subsidiary which in turn owned Victory Hill Exhibitions (VHE) that hold licensing rights for both Avengers and Transformers brands in partnership with Marvel Entertainment and Hasbro) from 2H16 onwards as more exhibitions are slated for the 2H16 and 2017. While management expects VHE (where bulks of the earnings are set to come from ticket sales and merchandise) to augment group’s earnings moving forward, it is reluctant to share any expectation and financial guidance at this juncture.

Target to complete its radio segment’s restructuring plan by 4Q16. STAR is keeping no secret reorganising its radio segment, where we understand management is currently exploring various restructuring options (i.e. JV or outright disposal) on the RED & Capital FM radio stations. The group’s radio segment result continued to be disappointing in 1Q16, where its turnover was reduced by 7.2% YoY to RM11m with a LBT of RM0.4m.

Source: Kenanga Research - 31 May 2016