STAR’s near-term outlook is expected to remain challenging. We trimmed FY18-19E earnings by 29-36% post results briefing. With no immediate earnings catalyst coupled with its intention to preserve cash with likely impact on dividend payment, we are keeping our UNDERPERFORM call on the stock. Maintain TP at RM0.600.

Sluggish 9M18 performance. The on-going digital-focused transformation plan coupled with continued change in media consumption behaviours have led to STAR posting weaker set of results in 9M18, where revenue weakened by 16% YoY to RM299.6m with lower EBITDA of RM24.6m (-17% YoY). The group’s print and digital segment contracted by 24% YoY (to RM258m) in 9M18 as a result of lower performance of the print (-24% YoY to RM194m) and circulation (- 4.5% YoY to RM42m) revenues but partially offset by higher digital division contribution (+19% YoY to RM22m). The segment recorded a lower EBITDA of RM27m (-38% YoY) with margin contracting to 10.4% vs. 14.3% a year ago due mainly to the widening losses on its OTT venture – Dim Sum.

Transformation programme continues with…. The recent tie-up with Norway-based Cxense (a company that provides advertising, data management, search, analytics and content recommendation services) would allow STAR to ride on the latter’s data management platform which facilitates automatic capture of data in real-time across all devices. STAR intends to use Cxense to provide the group with a holistic view of its sites, content and visitors’ intent.

…further cost rationalisation. STAR is set to launch another round of mutual separation scheme (MSS) in coming months, which targets to trim a total of c.200 personnel and lower its total staff strength to 1.2k. The exercise is expected to cost c.RM15m but save RM9m p.a. moving forward. Besides, STAR also intends to cooperate with peers to further rationalise its OPEX components (i.e. distribution/logistic costs and etc.).

Adex sentiment remains soft; rising newsprint prices. STAR expects ads spend to remain uninspiring in the next few quarters (due to the continued cautious mode adopted by advertisers as a result of policies’ uncertainties and change in media consumption behaviour) but foresee the sentiment to improve in the 2H19 as the government policies are likely to stabilise by then. Newsprint price has resumed its upward trend and is trading above USD700/MT presently (vs. c.USD600/MT in early of the year). Management believes the current trend will likely persist in view of the supply shortage globally. The group also plans to expand its Dim Sum OTT services (which currently have c.800k subscribers) into regional markets with an aim to achieve PBT break-even by year 2022.

Trimmed FY18-19E earnings by 29%-36%, respectively, after imputing lower ads revenue and higher newsprint price (to USD670/MT vs. USD600/MT previously) and higher OPEX assumptions as a result of the MSS plan. We also lowered our FY18-19E DPS to 1.7-1.8 sen (vs. 2.8-3.4 sen previously), based on a targeted pay-out ratio of 80% (vs. 95% previously) to align with management’s cash preservation intention.

Maintain UNDERPERFORM rating as the group’s bread-and-butter print segment continues to face challenges with diminishing ads revenue. Our TP maintained at RM0.600, based on targeted FY19 P/NTA of 0.53x, 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, and (ii) longer-than-expected gestation period for its OTT venture and future M&As.

Source: Kenanga Research - 10 Dec 2018