9MFY20 core LATAMI of RM52.6m (-860%) missed expectations as revenue persists to be soft amidst heavy than expected cost exposure. Absence of dividends was expected. Short-term outlook could continue to remain bleak as advertisers manoeuvre around economic uncertainties. Materialisation of potential acquisitions could be a positive short-term rerating. Maintain UP and TP of RM0.280.

9MFY20 weaker than expected. 9MFY20 core LATAMI of RM52.6m is deemed to have missed our/consensus full-year LATAMI estimates of RM52.1m/RM39.1m. The negative deviation is due to a deeper operating cost overrun (mainly for the print and digital business) as revenue streams were impeded by the Covid-19 MCO restrictions. No dividend was declared, as expected.

YoY, 9MFY20 revenue declined to RM145.5m (-39%) as all segments slowed from the implementation of the MCO in 2QFY20. During this time, physical newspaper sales were heavily impeded and many businesses refrained from advertising as private consumption and spending were held back. The group recognised RM50.5m compensation income from Jaks Island Circle Sdn Bhd (JAKS) for the late delivery of vacant possession of the investment property under construction. This penalty pertains to late payment interests of 8% per annum on the balance purchase price owed by JAKS to STAR between 25 October 2015 and 6 July 2020. Removing this with other adjustments, 9MFY20 core LATAMI registered at RM52.6m (-860%).

QoQ, 3QFY20 turnover improved by 53% to RM48.2m as movement controls were progressively relaxed and businesses recommenced with advertisements and consumer engagements. However, it is noted that the group’s Event and Exhibition segment did not book any revenue in lieu of the new restrictions. That said, the growth was not sufficient to support group operating activities. Following the same abovementioned adjustments, core LATAMI came in a RM22.3m, but was 16% better QoQ from the higher top- line.

More meaningful tidings needed. STAR looks to instil advertisers with its data analytics know-how and various platforms for more effective consumer engagement and monetisation. However, the cautious economic outlook and soft business prosperity might continue to hinder companies from investing too heavily into their marketing spends. Meanwhile, STAR is working to further rationalise and streamline operating functions to keep costs leaner, of which we believe much more needs to be done. On the flipside, the group is on the lookout for synergistic opportunities via acquisition, touting a cash pile of over RM350m.

Post-results, we extend our losses for FY20E/FY21E by 20%/110% on even bleaker margin assumptions. Given the group may continue to operate in a high cost environment, we believe it will take longer for the group to return to profitability.

Maintain UNDERPERFORM and TP of RM0.280. Our valuation is based on an unchanged 0.3x FY21E P/NTA at 1.5SD below mean level. We believe this has sufficiently weighed in the bleak outlook for the group coupled with the lack of dividend prospects in the near-term. We believe returning to the black could be a huge challenge as we believe the group has limited cost cutting options available and would require a more meaningful revenue booster to turn around. Though it is introducing new revenue streams, they might not see the aspired traction given the current economic landscape.

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

Source: Kenanga Research - 13 Nov 2020