STAR posted a disappointing 6M19 owing to the weak Print and Digital segment’s revenue and high opex. With that, we slash our FY19-20E by 39-48% respectively. Despite the challenges ahead, we believe the sell-down of the stock could be overdone as its digital assets could yield meaningful results in the near-term to buffer the weaker traditional media outlets. Upgrade to MP but with a lower TP of RM0.570 (from RM0.600).

Below expectations. 6M19 PATAMI of RM5.2m (-59% YoY) came in below expectations at 30%/35% of our/market’s FY19 estimates. Key negative deviations were mainly due to overly optimistic opex assumptions, mainly from the Print and Digital segment. As expected, no dividend was announced during the quarter.

YoY, 6M19 revenue dropped to RM160.3m (-23%), mainly due to lower Print and Digital contribution of RM141.7m (-20%). This came from weaker consumer sentiment and the lack of major events during the period, whereas 6M18 was enthused by the general election. PBT plunged to RM8.8m (-56%) as the decline in revenue did not soften the stubborn opex. Losses were seen in the Radio broadcasting segment at RM0.5m (-133%) following a 28% decline in revenue. The Events division also recorded a lower PBT of RM1.6m (-45.7%). Subsequently, 6M19 group PATAMI registered at RM5.2m (-59%).

QoQ, the group’s 2Q19 revenue declined marginally by 6%, due to the same lower print and event revenue. However, PATAMI fell even further by 53% as high opex persisted in line with the group’s continued efforts to explore into new revenue streams (i.e. wider digital offerings).

Competition arises. Broadly speaking, we believe that STAR would continue to see insurmountable challenges as traditional media and advertising channels gradually lose their relevance against digital platforms. With regards to this, the group is also investing heavily to grow its presence, with mediums such as StarProperty, Dimsum, Kuali and its E-tuition platform. However, it may not be smooth running as consumers could be spoilt for choice given the wide array of international offerings, enabled by borderless internet access. Still, we believe that STAR could see favourable traction on the back of its strong localised content and identity as a reliable news platform.

We slash our FY19-20E PATAMI by 39-48% given the disappointing 2Q19 report card. We continue to expect opex to increase going forward, premised on higher cost on its OTT platform and on-going search for new revenue streams.

Upgrade to MARKET PERFORM while reducing our TP to RM0.570 (from RM0.600, previously). The lower TP came from a weaker NTA/share of RM1.10 (from RM1.16) following our earnings cut, while leaving our 0.52x FY20E P/NTA valuation unchanged. This is in line with the stock’s -1.5SD over its 3-year Fwd. average. We believe that most of the negatives have already been priced in following the YTD share price decline of 16%, where it is also currently at its lowest price level. We believe sentiment has already floored as most of the negatives have already been priced in and we believe that its digital assets could potentially cushion the impact from its declining traditional adex revenue going forward.

Key risks to our call include: (i) higher/lower-than-expected adex revenue, and (ii) better/worse-than-expected margins following various cost initiative plans.

Source: Kenanga Research - 29 Aug 2019