We attended STAR’s post 3Q16 results’ briefing yesterday. The key highlights of the briefing focused on: (i) dividend, (ii) its new OTT venture – dimsum, and (iii) adex outlook. Postbriefing, we have reduced our core FY16E/FY17E core PATAMI by 15%/13%, respectively, after incorporating the OTT venture and potential disposal gain into the model. Maintained MARKET PERFORM but with lower TP of RM2.32 (vs. RM2.51 previously) based on targeted FY17E PER of 17.1x, representing an unchanged targeted 5-year mean. Key upside risks to our call include: (i) higher-than-expected event division’s contribution, and (ii) lower-than-expected content cost.

Dividend ambition. STAR intends to sustain its DPS of 18.0 sen in FY16 should the reported PBT achieve a similar quantum as for the past financial year (RM170m). While the group could potentially bag c.RM20m disposal gain from the proposed disposal of two radio stations, the PBT target, however, still appears to be a tall order in view of the uninspiring 9M16 reported PBT of RM98.7m. Also, the initial start-up costs incurred from its recently launched online streaming platform – dimsum, is likely to dampen FY16 performance and offset the potential disposal gain. As a result, we are lowering FY16E DPS estimate to 15.0 sen (from 18.0 sen previously; 1H16: 9.0 sen), which implied a dividend yield of 6.2%.

Dimsum – a newbie in the OTT streaming platform. Dimsum is the first homegrown over-the-top content (OTT) offering exclusively Asian content. The service was made available since 8 Nov 2016 and is available for download on Google Play, Apple App store as well as can also be viewed on Windows and Mac devices. Subscribers, who pay RM15 a month, can choose from 10k hours of content, including movies, dramas, documentaries, variety shows and children’s programmes from China, Japan, Taiwan, Thailand, South Korea and Malaysia. The dimsum platform has ample horror movie's contents (which management believes is underserved) and comes with five keys unique proposition (i.e. five concurrent users; full HD; offline viewing; parental control and subtitles). The group is set to collaborate with major local telcos in coming weeks and aim to launch its dimsum 2.0 version (i.e. tablet compatibility 7 Smart TV app) in 1H17.

Incubation period. While management is reluctant to share any financial numbers for now, it was quoted to have a similar business model as iFlix. STAR believes its OTT content venture gestation period is likely to be shorter than the traditional TV station of 9-12 years. Dimsum has attracted more than 10k downloads since inception, based on Google Play store data, while iFlix has achieved more than 1.5m subscribers (with USD30m spent in content costs) in Malaysia, Thailand and the Philippines at the end CY15, according to press report early this year. The group has recorded RM6.7m in turnover with LBT of RM120m in CY15, based on the latest SSM filing.

Adex outlook. STAR is expecting a sequential better adex outlook in 4Q, mainly driven by a seasonality factor as well as numerous aggressive automotive campaigns. Moving forward, while the country’s adex outlook is set to remain cautious in FY17, management believes the 2017 Southeast Asian Games (which will take place at Kuala Lumpur from 19-31 August) could provide some booster, especially to the FMCG players. Note that, the group’s 9M16 print adex revenue has dipped 15.5% YoY to RM345m, in tandem with the overall print players’ performance where the gross adex deteriorated by 15.8%YoY during the said period.

Reduced FY16E and FY17E core PATAMIs by 15%/13% to RM63m and RM100m, respectively, after: (i) imputing a potential disposal gain of RM20m in FY16, and (ii) incorporating the OTT venture into our financial model. We assumed dimsum to record: (i) 40k downloads in FY16 followed by 280k by end-FY17 (with 45% turning into paid subscribers), and (ii) c.RM31m (or 25% of iFlix’s content costs) during the initial year followed by RM20m annual content cost thereafter.

Source: Kenanga Research - 24 Nov 2016