STAR posted an unexpected soft performance in 1Q17 due to lower Print and Radio segments turnover and margin constraints. No dividend was announced during the quarter, as expected. In view of the challenges ahead, we have slashed our FY17E/FY18E net profit by 27%/28% post the result review. Downgrade to UNDERPERFORM (from MARKET PERFORM call previously) with lower TP of RM1.85 (vs. RM2.40 previously), based on targeted FY18E PER of 17.9x, representing an unchanged targeted 5-year mean.

Negative surprise. 1Q17 PATAMI of RM6.6m (-57% YoY) came in way below expectation and merely accounted for 6.6%/7.6% of our/market’s full-year expectations, respectively, due to its lower Print and Radio segments revenue as well as margin constraint. No dividend was announced during the quarter, as expected.

YoY, 1Q17 revenue declined by 8% to RM183m due mainly to the lower Print (-19.5% to RM114m) and Radio (-9.5% to RM10m) segments’ turnover as a result of the poor consumer and business sentiments. PBT, meanwhile, dipped by 38.5% to RM14m, no thanks to the lower Print & Digital segment revenue as well as thinner margin (7.1% vs. 19.1% in 1Q16). We believe the margin constraint was partially due to the start-up losses incurred by its new OTT venture – dimsum. QoQ, 1Q17 turnover reduced by 30% as a result of lower revenue from Print, Radio and Event segment. The weak turnover coupled with higher-than-expected OPEX has led the group’s core PATAMI to plunge by 69% in 1Q17.

Print and Digital revenue contracted by 19.5% due to lower adex revenue amid poor consumer sentiment as a result of rising cost of doing business, which affected the overall adex negatively. Radio broadcasting segment’s revenue, meanwhile, declined by 9.5% as a result of the poor sentiment arises from the sluggish economy. Its PBT, however, recorded a profit of RM1.1m vs. LBT of RM0.4m a year ago largely due to cost savings arising from the disposal of Red FM and Capital FM stations. Television division’s revenue improved by 66% and managed to narrow its LBT to RM1.3m vs. RM2.0m in 1Q16. On the other hand, Event division’s revenue advanced by 29% mainly driven by higher contribution from exhibitions and intellectual property rights (IPR) held by Cityneon. The strong IPR contribution has led the segment’s PBT to soar to RM7.5m compared to LBT of RM1.8m a year ago.

Outlook for this year is expected to remain challenging as a result of subdued adex sentiment due to rising cost of doing business. The country’s gross adex (ex-pay TV) growth rate has deteriorated by 16% YoY in 1QCY17, according to Nielsen Media Research. In view of the challenges ahead, we have lowered our country’s CY17 gross adex growth rate to -4.7% YoY, instead of a flat expectation previously.

Slashed FY17E/FY18E core PATAMI by 27%/28%, after: (i) incorporating the weak 1Q 17 numbers, (ii) reducing print adex revenue assumptions by -9%/-7% to RM421m/RM432m and (iii) removing Cityneon’s contribution from 4Q17 onwards. To recap, STAR has announced a disposal of its 52.51% stake in Singapore-listed Cityneon to Lucrum 1 Investment in mid-May for RM360m cash. Management expects the proposed disposal to be completed by 3QCY17 and record a realised gain on disposal of c.RM214m.

Potential special dividend on the card? In view of the decent net proceeds arising from the proposed disposal of Cityneon, we do not discount that a potential special dividend (of up to RM0.487/share) would likely be proposed should there is no major capex or acquisition in the pipeline. Should the scenario materialize, it would likely provide some support to the group’s share price over the short-term.

Source: Kenanga Research - 24 May 2017