STAR’s 9MFY23 results missed expectations mainly due to lower-than-expected radio adex (radex). On the bright side, there was sequential improvement in topline as well as pre-tax margin and profit at the property segment. We cut our FY23-24F earnings by 34% each, lower our TP by 4% to RM0.52 (from RM0.54), but maintain our OUTPERFORM call.

Disappointed due to decreased radex. 9MFY23 core net profit of RM1.9m came in at 43% and 38% of our full-year forecast and the full-year consensus estimate, respectively. The variance versus our forecast was due to lower-than-expected radex, coupled with higher taxes.

Impacted by broader industry decline in radex. STAR’s topline expansion was mainly attributed to the property development segment, following the launch of the Star Business Hub (SBH) project. To a lesser extent, revenue was also boosted by the print segment on the back of: (i) cover price increase, and (ii) higher adex from a new product, Majoriti 7 (launch: late-2022).

However, its YTD bottomline (-71%) was dragged by the Radio segment due to lower radex. This is in-line with the broader industry-wide deterioration for radex (-3% YTD). As a result, the segment slipped into pre-tax losses in 3QFY23 after it turned around in the prior two quarters. Additionally, the decline in group earnings was exacerbated by: (i) increase in newsprint costs, (ii) stronger USD/MYR which we believe led to higher content costs, and (iii) higher effective tax rate of 29% (9MFY22: 8%).

According to Nielson, 9MFY23 adex for The Star newspaper plummeted by 13% YTD. On the other hand, revenue for the print, digital and events segment increased by 4% YTD. We believe this was mainly due to the increase in The Star’s cover price since April to RM2.00 daily from RM1.60 (weekday) and RM1.80 (weekends).

On a brighter note, there was sequential improvement in 3QFY23 topline as well as pre-tax margin and profit at the property segment. Hence, this suggests that this segment may potentially emerge as a key earnings anchor in future.

Hope for property to anchor earnings. We are encouraged by the sustained turnaround at the property segment since 2QFY23 following SBH’s launch. To recap, this project has an estimated gross development value of RM130m and comprises five office complexes cum warehouses located in Bukit Jelutong, Shah Alam. We believe that successful execution of this project will catalyse STAR to deploy additional resources from its war chest to fund its diversification into property development. Additionally, this may also compel the group to monetize and develop its valuable land bank which includes assets at Bayan Lepas, Penang and Shah Alam, Selangor.

Moving forward, the softening USD/MYR may provide some relief to the group’s newsprint and content costs. The latter has now retraced to RM4.65/USD after having peaked at RM4.80/USD in late-Oct. Additionally, we expect a seasonal uplift in adex to boost STAR’s earnings in 4QFY23.

Forecasts. Our FY23-24F earnings are lowered by 34% each to reflect lower radex.

Following the cut in our forecasts, our TP is lowered to RM0.52 (from RM0.54) based on unchanged 0.7x FY24F P/NTA. Our valuation implies a discount versus the sector average to reflect STAR’s lower ROE versus sector leader MEDIA. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

We like STAR due to its: (i) proactive plans to future proof its earnings via a 5-year transformation journey, (ii) strong balance sheet with zero borrowings and sizeable cash of RM363m, and (iii) traction in efforts to transition to digital media.

Key risks to our call include: (i) sluggish progress in digitalization, (ii) inflated newsprint cost, and (iii) poor execution in new property development venture.

Source: Kenanga Research - 22 Nov 2023