The lower-than-expected print and ratio segments’ turnovers led STAR to record a disappointing set of 9M18 results and prompted us to cut our FY18-19E earnings by 32-43% post review. Besides, the change in leadership could also add to the uncertainties. Downgrade to UP with a lower TP of RM0.600 based on targeted FY19E P/NTA of 0.53x, implying -2SD below its 3-year mean.

Below expectations. 9M18 core PATAMI of RM14.3m (+2% YoY) came in below expectation and merely accounted for 45%/50% of our/market’s full-year estimates. On our end, the key discrepancies were mainly due to lower-than-expected print and radio segments’ turnovers and higher-than-expected OPEX. No dividend was announced during the quarter, as expected.

YoY, 9M18 revenue dipped by 16% to RM300m, mainly due to the lower Print and Digital (-16% to RM258m) segment’s turnover as a result of the weak consumer and business sentiments. PBT, meanwhile, plunged by 90% to RM22.3m, due mainly to the absence of gain on disposal of Cityneon which amounted to RM206.86m previously. Excluding the EI, the group’s PBT would have recorded an increase of 8.2%, thanks to better cost management following the Mutual Separation Scheme/Early Retirement Option (MSS/ERO) exercise in 4Q17 and lower depreciation expenses from Print segment. QoQ, 3Q18 turnover declined by 8% due to lower print and digital revenue as advertisers remained cautious with their spending post the 14th GE. Despite the weak turnover coupled with additional retrenchment cost arising from the Penang plant shutdown (RM1.4m) which was offset by the much lower finance cost (RM5k vs. RM806k), the group recorded a 13% jump in PATAMI.

Print and Digital revenue contracted by 16% in 9M18 due to lower adex revenue as a result of slowing economy and policies’ uncertainties, which affected the overall adex negatively. The segment, meanwhile, recorded a lower PBT of RM21m (-33% YoY) due to wider losses of its OTT venture – dimsum.my. Radio broadcasting revenue, meanwhile, declined by 18% as a result of the poor sentiment arising from the sluggish economy in 9M18. PBT, meanwhile, plunged by 75% to RM1.1m in tandem with a lower turnover. On the other hand, Event division’s revenue (which consists of I.Star Ideas Factory) surged by 76% YoY (as a result of higher exhibitors' participation) in 9M18 with higher PBT of RM2.2m vs. -RM0.4m a year ago. Noteworthy, on a sequential performance basis, STAR’s Radio and Event divisions were in red in 3Q18 as a result of diminished turnovers.

Change in leadership. In a separate announcement, STAR announced that Datuk Seri Wong Chu Wai has submitted his notice of his retirement as GMD and CEO of the group effective from 1 January 2019. The group, however, has yet to appoint a suitable successor. We were not entirely surprised of the said changes given the conclusion of MCA’s general election recently.

Slashed FY18E-19E PATAMI by 32-43% after incorporating the weak 3Q numbers and revising our revenue and OPEX assumptions, post the results review. Correspondently, we have also lowered our FY18- 19E DPS estimate to 2.8-3.4 sen (vs. 4.0-6.0 sen previously), implying a payout ratio of 95% each, respectively.

Downgraded to UNDERPERFORM (vs. OP previously) as the group’s bread-and-butter print segment continued to face challenges with diminishing ads revenue. Our TP, meanwhile, is lowered to RM0.600 (vs. RM0.950 previously) based on lower targeted P/NTA of 0.53x (vs. 0.82x previously), implying 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 shifts towards digital platforms, and (ii) longer-than-expected gestation period for its OTT venture and future M&As.

Source: Kenanga Research - 03 Dec 2018