9MFY19 earnings of RM5.4m (-62%) missed expectations as its traditional media channels suffer ongoing contraction. Absence of dividend was expected. Expansion in the digital space will be necessary for the group to wade against the industry-wide decline, although we see this as a medium to long-term effort. Downgrade to MP with a lower TP of RM0.420 (from RM0.570) on lower FY20 NTA valuations and earnings on more conservative margin assumptions.

9MFY19 disappointed. 9MFY19 PATAMI of RM5.4m made up merely 52%/53% of our/consensus full-year estimates, way below expectations. The negative deviation appears to come from unanticipated losses from the Print and Digital segment in 3QFY19, owing to a frail adex landscape. No dividend was announced this quarter, as expected.

YoY, 9MFY19 revenue declined 20% to RM239.9m, weighed down by poorer performance in its key segments; (i) Print and Digital (-19%), and (ii) Radio broadcasting (-19%). We reckon the weakness in these segments could be due to the diminishing advertising demand on traditional media channels. PBT declined by 57%, likely as the abovementioned reasons dragged operating efficiencies and cost management (PBT margin: 4.0%, -3.4ppt). In addition to heavier effective taxes (42.4%, +7.1ppt), 9MFY19 PATAMI shrank by 62% to RM5.4m.

QoQ, 3QFY19 revenue bumped up slightly (+2%) from more Radio demands and events being hosted. Print and Digital businesses, however, continued to decline. Bogged by poorer Print and Digital margins on less than optimal cost efficiency, 3QFY19 PATAMI came in at RM0.3m (-85%).

Trying to stay in check. Traditional media businesses continued to see diminishing relevance as adex is progressively shifting towards digital channels. The group has recently introduced new management with media savvy expertise to reinvigorate its business operations. Presently, STAR’s digital roadmaps include expanding its existing platforms (i.e. Star Online, Star Property, Dimsum) and to enable cross-selling opportunities. However, this could be dragged by its traditional newspaper publishing business, which we believe will remain of importance to the group, being its namesake and core business.

Post-results, we slashed our FY19E/FY20E earnings by 27%/18% on more conservative estimates for margins.

Downgrade to MARKET PERFORM with a lower TP of RM0.420 (from RM0.570, previously). In addition to the lower earnings assumptions, our lower TP comes from lower applied valuation of 0.4x FY20E NTA, which is 1.5SD below the stock’s 3-year mean. While we are optimistic with the new management, it could be a medium-term effort to revitalize the company’s fundamental. Until then, we believe investors may view the stock passively.

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 Nov 2019