STAR has received an expression of interest for its Cityneon stake. We are NEUTRAL on the news as the exit plan (should management decide to dispose its stake in Cityneon) could result in short-term gain but medium-term pain. We made no changes to our FY17/FY18E numbers, pending the upcoming results release. Maintain MARKET PERFORM with unchanged TP of RM2.40, based on targeted FY18E PER of 16.6x, representing a 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.

Received an expression of interest for its Cityneon stake. In a filing with Bursa Malaysia on last Friday, STAR said its wholly-owned subsidiary – Laviani Pte Ltd, was notified by Bird & Bird ATMD LLP (a legal firm in Singapore) that the former’s clients are interested to purchase Laviani’s entire equity interest in Singapore-listed Cityneon comprising 128.46m or 52.51% equity stake. Cityneon was last traded at SGD0.955, giving it a market capitalisation of SGD233.6m (or RM722.0m), which implied that STAR’s stake in Cityneon is valued at SGD122.7m (or RM379.0m).

Cityneon’s background. Cityneon, a full service ideas agency specialising in transforming customer and brand experiences, encompasses five business segments – events, exhibitions, experiential environment, interior architecture, and intellectual property rights (“IPR”). The group’s jewel is mostly its IPR segment, which focus on delivering engaging educational and interactive exhibitions through its rights to hold events for Marvel’s Avengers S.T.A.T.I.O.N and Hasbro’s TRANSFORMERS (until 2024/2023, respectively). As of end-FY16, Cityneon posted a revenue/EBIT of SGD96.7m/SGD11.9m (of which the IPR segment accounted for 18%/59%) and contributed 34%/19% to STAR, respectively. Moving forward, consensus is expecting Cityneon’s turnover/EBIT to growth by 22%/49% to SGD118m/SGD18m in FY17, respectively.

Raising interest by existing shareholders? While the names of the interested parties are unknown, we do not discount that the current financially strong shareholders, i.e. China’s CMC and others may have an interest in raising their stakes in view of their current limited exposure. Note that STAR has reduced its stakes in Cityneon from 64.97% to 52.51% post the disposal of 15.0m shares at SGD0.55/share and issued 20.0m new shares to China's media giant CMC holdings as well as other institutional investors in May last year.

Indecisive for now but open to explore. While management has yet to make any decision, we believe, STAR is open to explore the possibility of disposing its Cityneon stake should the offer price is attractive, based on our earlier understanding. Having said that, in view of the improved Cityneon’s financial performance coupled with its controlling status to the former, we believe, STAR will only consider the offer should the proposed price is attached with an attractive premium. Note that, the net assets of Cityenon in STAR’s balance sheet stood at RM114m as of end FY16, according to its annual report.

What’s next, if STAR exits its venture in Cityneon? We do not discount that a potential special dividend could be proposed (albeit the quantum is too earlier to estimate for now) should there is no major capex or acquisition in the pipeline. On the flip side, should STAR decide to dispose all its stake in Cityneon, our current FY18E net profit of RM107m could be lowered by 25%-35% given the loss of latter's earnings contribution will unlikely to be offset by other segments/ventures (i.e. Dimsum and others) over the short-term.

FY17/FY18E earnings forecast maintained unchanged for now, pending on the upcoming result release. While STAR’s print segment is expected to remain challenging in FY17 in view of the subdued adex outlook, its Event division with the improved contribution from its IP rights and expanded exhibition installation base) could provide a much-needed cushion to its earnings

Source: Kenanga Research - 8 May 2017