STAR posted a disappointing 3M19 owing to the weak Print and Digital segment’s revenue and this led us to reduce our FY19-20E PATAMI by 9-10%, respectively. With no immediate earnings catalyst coupled with uninspiring adex outlook, we are keeping our UNDERPERFORM call with an unchanged TP of RM0.600, based on targeted FY19E P/NTA of 0.53x.

Below expectations. 3M19 core PATAMI of RM3.5m (-69% YoY) came in below expectations at 19%/16% of our/market’s full-year estimates. On our end, the key negative deviations were mainly due to lower-than-expected print turnover. No dividend was announced during the quarter, as expected.

YoY, 3M19 revenue dipped by 24% to RM83m, mainly due to the lower Print and Digital segment’s turnover (-22% to RM72m) as a result of the poor consumer and business sentiments. PBT, meanwhile, plunged by 68% to RM5.7m, due mainly to the weak revenue coupled with lower operating income and higher OPEX. The group’s PATAMI, meanwhile, deteriorated by 69% aligning with the weak PBT. QoQ,

3M19 turnover weakened by 11%, no thanks to the weak Print and Radio segment’s performance. Group PBT, however, improved 143% due to the absence of the one-off MSS expenses (c.RM15.8m) that was incurred in the Print and Digital segment in the prior quarter.

Print and Digital revenue contracted by 22% YoY in 3M19 due to lower adex revenue as a result of weak market sentiments. The segment also recorded a significant lower PBT of RM3.6m (-82% YoY) vs. RM21m in 3M18 due to higher fixed cost and lower economies of scale. Radio broadcasting revenue, meanwhile, declined by 35% YoY as a result of the slowdown in ad spending and incurred a small loss of RM0.09m during the quarter. On the other hand, Event division’s revenue (which consists of I.Star Ideas Factory) softened by 12% YoY (as a result of fewer exhibitors' participation) in 3M19 with lower PBT of RM1.6m vs. RM2.7m a year ago.

Lowered FY19-20E PATAMI by 9-10% after incorporated the weak 1Q19 results into our model as well as revising our print and event segments’ revenue assumptions.

Maintain UNDERPERFORM as the group’s bread-and-butter print segment continued to face challenges with diminishing ads revenue. Our TP, meanwhile, is maintained at RM0.600 based on an unchanged targeted P/NTA of 0.53x. The targeted P/NTA also implied c.30% premium to the recent M&A transaction where 31.6% stake of Utusan Melayu Bhd (which publishes the Utusan Malaysia Malay-language daily) changed hand at 19.0 sen per share (or implied c.0.4x P/NTA). We believe the premium attached is justifiable given STAR being in a much better financial position than Utusan, which currently is still lossmaking.

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 - 17 May 2019