9M17 results came in above our conservative forecast. No dividend was announced as expected. While there are no near-term catalysts in place, the deeper-than-expected recent share price correction could provide some bargain hunting opportunities. Besides, with a potential >8% dividend yield, it could attract yield-hungry investors. Upgraded to OUTPERFORM but with a lower TP of RM1.65 based on targeted forward P/BV of 1.5x, implied a -1SD below its 5-year mean.

Boosted by a disposal gain. 9M17 core PATAMI of RM38.6m (-26.4% YoY) came in above expectations and accounted for 102%/109% of our/market’s full-year expectations due to our overly conservative forecast and lower-than-expected minority interest in 3Q17 (RM12m vs. RM1m in 3Q16). Note that, our core PATAMI was derived after removing RM207m gain on disposal of a subsidiary, Cityneon. No dividend was announced during the quarter, as expected.

YoY, 9M17 revenue (ex-Cityneon - discontinued operations) dipped by 18% to RM391m due mainly to the lower Print and Digital (-19% to RM340m) segment’s turnover as a result of the poor consumer and business sentiments. Core PBT, meanwhile, plunged by 75% to RM20.6m, no thanks to the lower Print & Digital segment revenue as well as thinner margin (5.3% vs. 17.3% in 9M16). 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, 3Q17 turnover inched higher by 1% due to marginally improvement in its Print segment. The stable turnover coupled with RM207m gain on disposal of a subsidiary – Cityneon, led the group to record RM221m PATAMI vs. RM8.5m in the preceding quarter.

Print and Digital revenue contracted by 19% 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 2% as a result of the poor sentiment arising from the sluggish economy. Its PBT, however, recorded a profit of RM3.7m in 9M17 vs. LBT of RM3.5m a year ago largely due to cost savings arising from the disposal of Red FM and Capital FM stations. Television division’s revenue declined by 7% but managed to narrow its LBT to RM4.9m vs. RM6.3m in 9M16. On the other hand, Event division’s revenue (which consists of I.Star Ideas Factory) dipped by 24% (as a result of lower exhibitor’s participation) with wider LBT of RM0.33m vs. RM0.14m a year ago.

MSS yet to be concluded. STAR has introduced a Mutual Separation Scheme (MSS) in late-September with the aim to reduce its headcount to sail through the challenging adex environment. We understand that STAR is eyeing to reduce more than 200 staffs (mostly from the print segment) with an aim to complete the exercise by 4Q17.

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. Besides, the group also will continue to defend the Print segment and step up its cost-cutting measures, including reduction in headcount.

Upgrade to OUTPERFORM as trading opportunity may arise followed the recent sharp share price correction (-20% since end-September). Post result review, we have raised our FY17 core PATAMI by 25% after incorporating the better 3Q17 performance but keep our FY18E numbers unchanged. Our target price, however, is reduced to RM1.65 (vs. RM1.80 previously) after lowering the targeted forward P/BV from 1.6x to 1.5x (which implied a -1SD below its 5-year mean) to reflect: (i) the potential weak circulation volume ahead following a recent 10 sen hike in cover price, and (ii) persistent weakness in the print adex outlook due to a structural shift in adex towards digital.

Source: Kenanga Research - 21 Nov 2017