While STAR’s first interim dividend was below our expectation (along with its frail 1H17 performance), the special DPS of 30.0 sen came as no surprise. We also downplay the group’s intention to expand beyond the media space and slashed our FY17/18E NPs by 52%/28% post the results review. Downgrade to UNDERPERFORM (from MARKET PERFORM call previously) with a lower TP of RM1.80 (vs. RM2.35 previously), after changing the valuation metric to P/BV (vs. PER previously) in view of its volatile earnings ahead. Our TP is based on targeted P/BV of 1.8x, implied its 5-year average mean.

Another disappointing quarter. 1H17 PATAMI of RM15.2m (-63% YoY) came in way below expectations and merely accounted for 20%/22% of our/market’s full-year expectations, respectively, due to its lower-than-expected Print and digital segment's revenue as well as margin constraint. It announced a total DPS of 36.0 sen (comprised of 6.0 sen first interim dividend (ex-date: 27th September) and 30.0 sen special dividend). Despite the first interim dividend coming below our 9.0 sen expectation, we deem it fair considering the weak financial performance. The special dividend, meanwhile, also came in as no surprise as we had earlier anticipated the group to reward shareholders following the disposal of Cityneon.

YoY, 1H17 revenue (ex-Cityneon - discontinued operations) dipped by 10% to RM417m due mainly to the lower Print (-21% to RM226m) segment’s turnover as a result of the poor consumer and business sentiments. PBT, meanwhile, plunged by 89% to RM7m, no thanks to the lower Print & Digital segment revenue as well as thinner margin (2.7% vs. 19.5% in 1H16). We believe the margin constraint was mainly due to fixed costs as well as start-up losses incurred by its new OTT venture – DimSum. QoQ, 2Q17 turnover reduced by 1% as a result of lower revenue from its Print segment. The lower turnover coupled with higher-than-expected OPEX caused the group to record net loss of RM1.5m vs. RM3.3m net profit in 1Q17.

Print and Digital revenue contracted by 21% 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 revenue, meanwhile, declined by 5% as a result of the poor sentiment arising from the sluggish economy. Its PBT, however, recorded a profit of RM1.6m in 1H17 vs. LBT of RM2.3m 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 21% and managed to narrow its LBT to RM3.5m vs. RM4.5m in 1H16. On the other hand, Event division’s revenue advanced by 9% mainly driven by higher contribution from exhibitions and intellectual property rights (IPR) held by Cityneon. The strong IPR contribution led the segment’s PBT to soar 50% YoY to RM27.5m.

Adex outlook for this year remains challenging as a result of subdued adspend sentiment due to rising cost of doing business. The country’s gross adex (ex-pay TV) growth rate has deteriorated by 14% YoY in 1HCY17 but is expected to regain some lost ground in 2H as a result of several adex-friendly sport events.

What’s next? While pursuing a digital focused approach to its investments, STAR also highlighted that it may consider investments in other industries or non-core businesses, which could potentially enhance the group’s performance. While we concur with management’s view on the digital focused strategy, we downplay the plan to expand into the non-core or other industries' businesses that require technical know-how and longer gestation period.

Slashed FY17E/FY18E core PATAMIs by 52%/28% after: (i) incorporating the weak 1H 17 numbers, (ii) reducing print adex and removing TV segment.

Source: Kenanga Research - 22 Aug 2017