We attended STAR’s post-2Q16 results briefing yesterday. The key highlights of the briefing focused on: (i) Cityneon, a 52.3%- owned subsidiary listed in Singapore, and (ii) adex outlook. We came away with a better understanding on the business structure of the Cityneon group and prospect of its intellectual property's rights. All in, we make no changes to our FY16E/FY17E earnings estimates. Maintain MARKET PERFORM with a TP of RM2.60 based on unchanged targeted FY17E PER of 14.6x, representing the 5-year mean.

Cityneon’s revenue stream explained. Cityneon reported SGD46.3m (14% YoY) turnover in 1H16, of which 22% (or SGD10.2m) was generated from intellectual properties (IP) rights revenue generated from both the traveling and permanent exhibitions. Note that, the group’s wholly-owned subsidiary, Victory Hill Exhibitions has secured the rights to promote Marvel/Transformers-related characters through interactive exhibitions until year 2024/2023, respectively. Presently, Cityneon manages two permanent exhibition sets in Las Vegas and leases three traveling exhibition sets to organisers across China, Singapore and France. Revenue from traveling exhibitions consisted of licensing fees earned from event organisers during its pre-opening stage along with royalty payments. Royalties make up of 20%- 30% of the total exhibition turnover, which consists of ticketing and merchandise sales as well as backed by a minimum guarantee payment clause in the event the exhibit does not generate the desired amount of sales.

Strong movie pipeline stretching to 2020 (figure 1) for both Marvel and Transformers, which could provide sustainable momentum to its exhibition businesses. We believe Cityneon had a scalable business model with low execution risk, especially outside the U.S., where the group will find partners in the target region to undertake the operating risks. The group is expecting to organise a total of six exhibition sets by end-2017 followed by another eight sets a year later. All in, we expect Cityneon to record RM360m/RM420m turnover for FY16E/FY17E, in line with consensus estimates.

Potential to acquire third IP. Cityneon is eyeing on securing its third IP right in coming months. While Cityneon is reluctant to share more colours on the potential target, it did share the criteria to acquire the next IP, which include a box office of >USD1b and with sequels in the pipeline. Thus far, there are only about 26 movies falling into these categories (where we suspect Star Wars and/or Jurassic Park could be one of these), according to the management. Should the acquisition materialize, there is a strong likelihood to implement a fund raising exercise from its shareholders.

Adex outlook continues to be soft, as management expects prevailing weakness in the economic environment and consumer sentiment to continue to lead advertisers adopting a cautious mode in the following months. 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 businesses in video content (TheStarTV) and Audience Interest Marketing (AIM).

Heroes Rescue. While negative organic growth could continue to weigh on 2H16’s performance, strong earnings contribution from Cityneon (with improved contribution from the current and potential third IP right and expanded exhibition installation base) is expected to absorb some degree of downside bias at the group level. Meanwhile, the group’s high dividend yield of 6.8% is expected to provide some cushion against volatility.

Source: Kenanga Research - 26 Aug 2016