STAR is selling its 52.51% stake in Singapore-listed Cityneon Holdings Ltd for RM360m cash. The group is expected to receive a net proceed of RM359.6m with a realised gain on disposal of about RM214m. We are NEUTRAL on the news as the exit plan 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. Our MARKET PERFORM call is also backed by a potential special dividend (of up to RM0.487/share) post the disposal of Cityneon Holdings Ltd.

Proposed to dispose Cityneon for RM360m cash. STAR has entered into a conditional share purchase agreement with Lucrum 1 Investment for the proposed disposal of its entire 52.51% equity stake in Cityneon Holdings Ltd for SGD0.90/share (or equivalent RM360.18m or SGD115.61m) in cash. The proposed disposal would allow STAR to realise a gain on disposal of c.RM214.07m (or c.RM0.29/share) from its investment in Singapore-listed events and exhibition subsidiary. Barring any unforeseen circumstances, management expects the proposed disposal to be completed by 3QCY17.

Who is Lucrum 1 Investment? Lucrum 1 Investment is an investment holding company that is incorporated in the British Virgin Islands on 12 April 2017. The group is controlled by three key directors where Cityneon current CEO – Ron Tan is holding 15.5% equity stake while the balances are dominated by China’s Investors – Geng Zhihua (76% stake via Massive Right Investments) and Mutual Power International Ltd (8.5%, a wholly-owned subsidiary of Hong Kong’s listed Jin Bao Bao Holdings Ltd.).

Focus on its core strength. As the group’s core strength lies within the print and digital business’ segment, STAR has been exerting its efforts to expand into new digital media products. With the proposed disposal valued at 3.18x P/BV (or c.33x FY16 PER, which we believe the valuation is rich), it will allow STAR to unlock its investment in Cityneon and concentrate on the expansion of its primary business activities. STAR is expected to receive a total net proceed of RM359.6m post the proposed disposal and set to utilise for the future investments and working requirements, though the group has yet to identify any at this juncture.

Cityneon’s performance. Cityneon has recorded a sturdy performance in FY16 (as a result of its intellectual property rights in Marvel’s Avengers S.T.A.T.I.O.N and Hasbro’s TRANSFORMERS) with revenue/PBT surged by 4.7% YoY (to RM315.4m)/205% YoY (to RM24.6m) and contributed 34%/17% to STAR’s FY16 total turnover/PBT, respectively. Moving forward, consensus is expecting Cityneon’s turnover/PBT to grow by 22%/180% (to SGD118m/SGD20.6m) in FY17 followed by another 19%/38% (to SGD141m/SGD28.4m) a year later as a result of the higher contribution from its intellectual property rights.

Short-term gain but medium-term pain. In view of the decent net proceeds arise from the proposed disposal, 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. On the flip side, our current FY18E net profit of RM107m may be lowered by 25%-35% given the loss of Cityneon's earnings contribution will unlikely to be offset by other segments/ventures (i.e. Dimsum and others) over the short-term. All in, we are keeping our FY17/FY18E earnings forecast unchanged for now, pending on the upcoming result release on 23rd of May.

Source: Kenanga Research - 15 May 2017