INVESTMENT HIGHLIGHTS

• Undergoing business process reengineering to create a more lean business structure

• On the lookout for digital talents to strengthen its digital offerings

• Upcoming general election and 2018 World Cup could incite advertising spending

• Maintain BUY with unchanged target price of RM1.80

Business process reengineering. To recall, Star Media Group Bhd’s (Star) managed to maintain profitable in FY17, as compared to its immediate peer, despite a reduction in advertisement spending. We attribute this to effective cost management initiatives taken by the group. To create a more lean and sustainable business structure, management is currently engaging an external consultant group to relook into the group’s business and operation. The exercise would take approximately three to four months to complete.

Rightsizing the workforce. Star Media Group Bhd (Star) had also booked a mutual separation scheme / early retirement option expenses amounting to RM56.4m in 4Q17. This involves rightsizing the group’s workforce by 250 headounts to 1,250 headcounts currently. Nonetheless, we understand that Star is also on the lookout for prospective staff with the right digital skills to further expand and strengthen its digital offerings.

Advertising expenditure (adex) expected to improve. The management expect advertising spending to be encouraging in the immediate term, driven by the upcoming general elections and 2018 World Cup which commences in the middle of June 2018. Note that Star has 71% display market share for FY17. This would serve as a competitive advantage to the group as compared to its peers.

Awaiting the completion of Tower A in Pacific Star Business Hub. In 2011, Star has sold a piece of land in Section 13 for RM135m in return for a 15-storey office block known as Tower A. We understand that the tower is currently 95% completed and Star is demanding that Jaks Resources Bhd to rectify the remaining defective segment. Once completed, the group is planning to shift the radio and ‘dimsum’ operations to the new Tower A. At present, the radio operation is operating at Tropicana City Office Tower. The eventual relocation to Tower A would translates into an annual rental cost saving of approximately RM1m.

Impact. No change to our earnings estimates at this juncture.

Maintain BUY. Despite the tough market condition and disposal of Cityneon, the group managed to show improvement in its 4Q17 results. This is in light of the group’s effective cost management initiatives. We expect further cost optimisation in FY18 to support the group’s bottomline in the near term. 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 BUY recommendation with unchanged target price of RM1.80 per share based on dividend discount model (DDM) valuation methodology (discount rate of 6.1%).

Source: MIDF Research - 7 Mar 2018