Hard to call the bottom. We understand the pace of The Star’s YoY print adex contraction accelerated after the 13th general election (13GE) and is unlikely to improve markedly going forward. We cut our earnings estimates by 24-27% as we now expect its print adex to contract by 4% this year (+0% previously). As we still expect an annual DPS of 18sen, Star would dividend out more than what it earns. Following our lower earnings estimates, we also cut our TP by 20% to MYR2.12. With 24% downside potential and a weak outlook, we downgrade Star to SELL.

Operating environment increasingly difficult. We understand that The Star’s 1H13 print adex contracted approximately 5% YoY due to fewer full colour page ads by hypermarkets and markedly fewer classified ads. In fact, we understand that the pace of adex contraction YoY actually accelerated after the 13GE, held on 5 May 2013, due to the high Jun 2012 adex base driven by the UEFA Euro Cup, and fewer public sector ads in 2Q13. 2H13 is unlikely to be better due to strong Olympics-driven adex in Jul and Aug 2012.

1H13 DPR to exceed 100%? We now expect The Star’s print adex to contract by 4% in FY13 before stabilising in FY14 and growing by 2.5% in FY15. We previously assumed that its print adex would stabilise in FY13 and grow by 2.5% p.a. thereafter. The net impact is a 24-27% cut to our earnings estimates. Star will release its 2Q13 results tonight. We expect 1H13 core EPS of 7.5sen, down >25% YoY. As we expect 1H13 DPS to stay at 9sen (+0% YoY), this may arguably be the first time that Star has earned less than what it would pay out in dividends.

Downgrade to SELL, TP cut. We roll forward our ex-net cash DCF valuation period from end-FY13 to end-FY14. Our new TP of MYR2.12 is 20% lower than previously following our earnings downgrades. While our TP implies attractive yields of 8.5% p.a., we believe that Star will eventually have to cut dividends if earnings continue to contract going into FY14. In our view, the greatest near-term risk to earnings is the government’s subsidy cuts. Should Star lower its DPS from 18sen p.a. to a DPR of 70%, its yields would fall from 8.5% p.a. to 5.5-6% p.a..

Source: Maybank Research - 14 Aug 2013