INVESTMENT HIGHLIGHTS

• Soft ad spend led to management’s decision to look into the existing cost structure

• In search of sizeable investment opportunities to replace Cityneon

• Future dividend may be capped to fund for earnings accretive acquisition

• Downgrade to SELL a lower target price of RM1.80

Earnings recap. To recall, Star Media Group’s (Star) 1H17 normalised PATAMI came in at RM14.4m (-62.4%yoy). This was mainly attributable to lower contribution from the print and digital segment in view of poor market sentiment as well as start-up costs incurred for dimsum.

Revamping the legacy cost structure. Despite some improvement in macroeconomic number, the advertisement spending recovery remains soft. Management believe that advertisers are adopting a waitand-see attitude. Thus, to partially address this concern, management is actively executing cost-saving measures. This includes a leaner operating structure, disciplined cost control and improved efficiencies.

In search of ‘Cityneon’ replacement. With a sizeable cash reserve of RM326.7m as at 2QFY17, management is actively seeking for M&A opportunities. The acquisition target would preferable be within the media realm. However, they do not discount the possibility of investment in non-core businesses which are already profit-making. In addition, management is open to investment opportunities beyond the local shores.

Dividend. In view of the 30sen special dividend announced in 2QFY17, we do not expect any further dividend for the said financial year. However, for FY18, we are cutting our dividend assumptions to 11sen from 15sen previously. Due to the challenging business environment, the group’s cash generating capability has reduced considerably. Coupled with depleting cash reserve, we do not expect future dividend payment to be attractive. We are of the view that it would be better to conserve cash to fund for earnings accretive acquisition(s).

Impact. In addition to excluding the earnings contribution from Cityneon, we further cut the earnings contribution from the print and digital segment. As a result, we are revising downwards FY17 and FY18 earnings estimates by -53.9% and -67.4% respectively.

Target price. Following our downwards revision in dividend estimates, we are cutting our target price to RM1.80

per share (previously RM2.46) based on DDM valuation methodology (discount rate of 6.1%).

Downgrade to SELL. The group has embarked on its next digital transformation plan via the introduction of dimsum.my. However, we do not expect the initiative to be fruitful anytime soon. We view that the group is in dire need of another earnings accretive acquisition(s) to replace Cityneon. This is evident in the group’s latest quarterly results announcement. We are also concern on the depleting cash reserve. The group will need to balance between funding for M&A activities as well as maintaining its dividend commitment. In view of this, we are expecting future dividend payment to be capped. All factors considered, we are downgrading our recommendation to SELL (previously NEUTRAL).

Source: MIDF Research - 30 Aug 2017