INVESTMENT HIGHLIGHTS

• Star is selling its 52.51% stake in Cityneon for RM360.2m

• This could potentially lead to bumper dividend in FY17

• However, future cash generation capability of Star could be negatively impacted

• Maintain NEUTRAL with an unchanged target price of RM2.46 per share

Exiting Cityneon. Star Media Group Bhd (Star) is disposing its 52.51% stake in Cityneon Holdings Ltd (Cityneon) to Lucrum 1 investment Ltd (Lucrum) for a cash consideration of SGD115.6m (or RM360.2m). As at 31st March 2017, Star’s stake in Cityneon is worth RM146.1m. This translates into a gain on disposal of RM214.1m. The proceeds from the disposal would be used for future investments and general working capital as well as expenses related to the disposal.

Stronger cash reserve. The proposed disposal would increase the group’s cash reserve of RM499.6m as at 31st December 2016 by +72.1% to RM859.8m. This translates into cash per share of 48.8sen per share. We view that the stronger cash holdings could support the group’s capability to continue to distribute attractive dividends in the next few years. To recall, based on historical track record, the group’s annual dividend payout is approximately RM133.0m. As such, we do not discount the possibility that the group could distribute special dividend in FY17.

Impact. For FY17 and FY18, we are assuming Cityneon to contribute RM27.2M and RM36.9M to Star’s earnings respectively. Should Star successfully dispose its stake in Cityneon by middle of 2017, the group’s FY17 and FY18 earnings estimates would be negatively impacted by - 16.3% and -35.5% respectively. Nonetheless, we are maintaining our earnings estimates at this juncture pending the completion of the disposal. In-tandem, we are also keeping our dividend assumptions for both FY17 and FY18 unchanged.

Target price. We are maintaining our target price of RM2.46 per share based on DDM valuation methodology (discount rate of 6.1%).

Maintain NEUTRAL. We are short-term positive on the proposed disposal as it would significantly boost the group’s cash holdings. This could potentially lead to higher FY17 dividend being paid. However, on a longer term basis, we are gravely concern with Star’s cash generating capability. To recall, we are expecting Cityneon to be the main earnings generator in the near future which would mitigate for the ailing print segment. Moreover, we remain sceptical on the group’s digital initiatives as we view that they would yield limited results. Due to the lack of rerating catalysts, we are retaining our NEUTRAL recommendation on the stock. In the near term, we would advice investors to remain vested in the stock in anticipation of bumper dividend in FY17.

Source: MIDF Research - 15 May 2017