1Q18 results came in below our expectation. While the on- going evaluation of the traditional media may keep investors at bay, the removal of GST could enhance consumer and adex sentiment. Maintain MARKET PERFORM with lower TP of RM1.05 based on targeted FY18E P/NTA of 0.9x, implying -2SD below its 3-year mean.

Below expectations. 1Q18 core PATAMI of RM11.3m (+70.3% YoY) came in below our expectation and accounted for 20%/25% of our/market’s full-year expectations. On our end, the key discrepancies were mainly due to lower-than-expected top-line and higher-than-expected OPEX as well as taxation. No dividend was announced during the quarter, as expected.

YoY, 1Q18 revenue dipped by 8% to RM109m due mainly to the lower Print and Digital (-11% to RM92m) segment’s turnover as a result of the continued poor consumer and business sentiments. PBT, however, surged 173% to RM17.6m, thanks to better cost management, lower depreciation expenses from Print segment coupled with an absence of impairment of printing assets as well as Mutual Separation Scheme/Early Retirement Option exercise. QoQ, 1Q18 turnover declined by 14% due to lower print revenue as advertisers remained cautious with their spending. The weak turnover coupled with higher taxation rate led to a lower core PATAMI of RM11.3m vs. RM27.2m in the preceding quarter.

Print and Digital revenue contracted by 11% due to lower adex revenue amid poor consumer sentiment as a result of rising cost of doing business, which affected the overall adex negatively. Nevertheless, the segment recorded a higher PBT of RM20.7m (+155% YoY) due to lower salaries and depreciation expenses. Radio broadcasting revenue, meanwhile, declined by 4% as a result of the poor sentiment arising from the sluggish economy. Its PBT, however, recorded a profit of RM1.6m in 1Q18 vs. RM1.1m a year ago largely due to better cost management. On the other hand, Event division’s revenue (which consists of I.Star Ideas Factory) surged by 179% (as a result of higher exhibitors participation) with higher PBT of RM2.7m vs. LBT of RM0.1m a year ago.

Continue 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 will also continue to defend the Print segment and maintain its engagement with audiences via latest technologies. At the same time, the group will continue to optimize its costs and improve operating margins.

Disposing a non-core asset. In a separate announcement, Impian Ikon S/B, a wholly-owned subsidiary company of STAR, has entered into a Share Sale Agreement with Leaderonomics Capital S/B to dispose 51% equity interest in Leaderonomics S/B (which is mainly involved in the human capital development services, including training and consultancy) for a total cash consideration of RM5.65m. The deal is expected to be completed within 3 months from the date of the announcement and records a disposal gain of RM3.37m.

Lower FY18E/19E PATAMI by 9.8%/9.1% after revising our OPEX assumptions as well as the taxation rate, post the result review. Correspondently, we have also lowered our FY18E/19E DPS estimate to 6.0 sen each (vs. 9.0 sen previously) to align with the lower forecast.

Maintain MARKET PERFORM but with a lower TP of RM1.05 (vs. RM1.25 previously) after changing the valuation methodology to P/NTA (vs. P/BV previously) to better reflect the current operating environment. Our target price is based on a targeted FY18E P/NTA of 0.9x, implied an unchanged –2SD below its 3-year mean. Key upside risks to our call include: (i) higher-than-expected adex revenue, and (ii) better-than- expected margins following various cost initiative plans. Key earnings downside risks include: (i) persistent weakness in the print adex outlook due to a structural adex shift towards digital platforms, and (ii) longer-than- expected gestation period for its OTT venture and future M&As.

Source: Kenanga Research - 17 May 2018