Our pessimistic view on STAR remained unchanged after we attended its 2Q17 results briefing. The group’s near-term prospect is expected to be shadowed by the subdued adex outlook. While the stock’s sentiment could potentially be lifted by the upcoming M&A news, we are concerned on the potential rich premium attached. All in, we made no changes to our earnings forecast. Maintain UNDERPERFORM call with an unchanged target price of RM1.80, based on targeted P/BV of 1.6x which implied a 5-year average mean.

Searching for M&A opportunities. STAR is keeping no secret of it eyeing for new ventures to recoup the loss of earnings post the completion of divestment in Cityneon. While pursuing a digital focused approach to its investments, STAR also highlighted that it may consider investments in other industries or non-core businesses. Management also does not rule out venturing into the regional market should the opportunity arise. Having said that, we understand that the media outfit has outlined its intentions to acquire profitable companies rather than the green-field businesses that require a long gestation period. All in, while we concur with the management’s view, we are concerned that the group may need to pay a higher price for the earnings accretive-based industries/companies.

Stretching its digital offerings. STAR intends to leverage its country’s largest digital readers’ pool (c.113k as of the end CY16) via the regional collaboration. Although management is reluctant to elaborate further, we understand that STAR is currently in talks with several regional parties with an aim to launch new services in the coming months to supplement the group’s ePaper businesses. Besides, STAR also plans to launch more event-driven campaigns moving forward to draw advertisers’ dollars.

Prudent cost management and internal restructuring. To align with the group’s digital transformation road path, STAR is aiming to further optimise its operational cost structure to improve efficiency. Apart from rationalising its loss-making TV segment in October, the group also plans to further optimise its printing operations as well as manpower. At present, STAR has a total two printing plant in Penang and Shah Alam with a total staff strength of c.1.5k.

Dimsum updates. STAR’s Dimsum, the first home-grown over-the-top content (OTT) apps that mainly focus on offering exclusively Asian content, has managed to draw more than 100k downloads since the launching in last November. Expanding its paying subscriber base as well as simulcast titles remains the key priority tasks for the group in FY17 (where the group has collaborated with telcos and property developers to accelerate building its users base). The service continued to draw attention in the 15-35 age segment of which 70% are female. Financial performance wise, despite the group’s reluctance to share any financial numbers for now, we understand that Dimsum, which has a similar business model to iFlix, is still under the gestation period.

Key upside risks to our call include: (i) higher-than-expected ADEX, (ii) lower-than expected content cost, and (iii) remarkable progress in M&A activities.

Source: Kenanga Research - 30 Aug 2017