Despite a lack of near-term catalysts, recent share price weakness coupled with an attractive dividend yield of >9% could provide some bargain hunting opportunities. We made no changes to our earnings forecasts post attending its 4Q17 results’ briefing. Maintain OUTPERFORM call with an unchanged target price of RM1.60, based on targeted forward P/BV of 1.44x, implying a -1SD below its 5-year mean.

Legal dispute on property development. STAR is confident of defending its statement against Jaks Resources Bhd (JAKS) and believe will receive the bank guarantees of RM50m that was provided by the latter in relation to ensuring the completion and delivery of the Tower A (currently c.95% completed) in Section 13. JAKS subsequently obtained an ad-interim stay restraining the banks from fulfilling the bank guarantees. The matter is to be heard on March 7. In a separate announcement yesterday, JAKS has issued a notice of arbitration to resolve the legal disputes. Having said that, the bank guarantee is set to return (after deducted the relevant interest charges) to JAKS when the latter complete and deliver the said property development. We understand that STAR intends to reallocate its Radio and Digital (Dim Sum) operations to the Tower A (which has a net rentable square feet of c.230k) and occupies three floors throughout the building. To recap, under the corporate guarantee, JAKS is to ensure its subsidiary, JAKS Island Circle S/B (JIC), fulfils all its obligations under the SPA signed in August 2011 where STAR sold a piece of land in Section 13 for RM135m. In lieu of cash, JIC is to deliver a 15-storey office block known as Tower A. Nevertheless, the delivery of the tower has been delayed by 28 months despite the media company giving four extensions.

Upcoming transformation programme focus on business direction and... STAR has appointed an international consulting firm to conduct a study on its group structure and business direction. The comprehensive study, which is set to be completed in coming weeks and targeted to be implemented within the next three-month, is expected to provide a new business direction to the group in relation to its upcoming new ventures as well as the cost rationalisation plan. The group is keeping no secret of 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 has earlier highlighted that it may consider investments in other industries or non-core businesses.

…cost rationalisation. The group had launched a mutual separation scheme/early retirement option (MSS/ERO) in 4Q17, where c.250 staff participated, reducing the group’s total staff strength to 1,250. The above exercises are expected to save c. RM30m p.a., according to management. Moving forward, management does not discount further rationalisation of its OPEX components to align with the upcoming transformation programme.

Adex sentiment remains soft but expects to be lifted by two major events. Despite the adex sentiment remaining weak during the first two months of the year (with adex visibility of <1 month), management remains hopeful for the upcoming two major events (Malaysia’s 14th General Election and FIFA World Cup) to provide a much-needed boost to forward ad spend. We concur with management’s view and maintain our 2018 gross adex (ex-Pay TV) growth forecast unchanged at +4.5% YoY. On the dividend aspiration front, while the group does not have a formal dividend policy in place, we understand that the group is aiming continue to reward its shareholders. The group distributed 42.0 sen (including the 30.0 sen special dividend) DPS to its shareholders in FY17 despite various challenges. Thus, we estimate that STAR is likely to continue to distribute 12.0 sen dividend in FY18 and FY19 despite the overall adex outlook remains challenging.

Source: Kenanga Research - 07 Mar 2018