INVESTMENT HIGHLIGHTS

• Stronger 3QFY17 normalised earnings due to improvement in profit margin

• 9MFY17 financial performance better than expected

• Group’s dividend commitment remains intact, underpinned by sizeable cash reserve

• Upgrade to BUY with unchanged target price of RM1.80

Better profit margin. Star Media Group (Star) has shown some improvement in its latest 3QFY17 (+35.4%yoy) financial performance. This was mainly due to improvement in profit margin as the group continues to focus on creating a leaner cost structure. Cumulatively, the group’s 9MFY17 normalised earnings came in at RM30.3m (-39.6%yoy). The bulk of the exceptional items pertained to gain on disposal (RM206.8m) and gain on foreign exchange (RM8.1m). All in, the group’s 9MFY17 financial performance came in better than our expectation but below consensus forecast, accounting for 112.2% and 59.2% of FY17 full year earnings estimates respectively.

Impact. We are revising upwards our FY17 and FY18 earnings estimates to RM37.4m and RM42.1m respectively. Our revisions in earnings are mainly premised on: (i) better profit margin assumption for the broadcasting and television business segments; and (ii) lower depreciation and amortisation charges to better reflect the results thus far.

Cash reserve remains sizeable. Star’s cash reserve surged by +41.1% as at 3QFY17 to RM705.0m as compared to RM500.0m recorded as at 4QFY16. This was mainly due to cash received from the disposal of Cityneon. Subsequent to the payment of first interim and special dividend which amounted to 36sen per share or RM265.7m, we view that Star’s cash reserve would remain sizeable at RM439.4m or 59.5sen per share. This would enable Star to maintain its commitment to deliver attractive dividend yield.

Maintain target price and upgrade to BUY. Despite the tough market condition, the group has managed to record a profitable 3QFY17 due to the various marketing efforts implemented as well as effective cost management. Coupled with sizeable cash reserve, we view that the group would still be able to provide an attractive dividend yield of 8%. Note that we have imputed a conservative dividend payment to cater for the group’s investment opportunities to grow its earnings base. All factors considered, we are maintaining our target price of RM1.80 per share based on dividend discount model (DDM) valuation methodology (discount rate of 6.1%). Pursuant to recent price weakness, we are upgrading the stock recommendation to BUY from SELL previously.

Source: MIDF Research - 21 Nov 2017