INVESTMENT HIGHLIGHTS

• Improvement on 1Q18 normalised earnings as a result of better cost management and lower depreciation expenses

• 1Q18 financial performance came in-line with ours and consensus expectations

• Future dividend payment to be capped in view of declining reserves

• Downgrade to NEUTRAL with lowered target price of RM1.04

Stronger 1Q18 bottomline. Star Media Group Bhd’s (Star) 1Q18 normalised earnings came in at RM11.6m. This translates into an increase of +92.3%yoy from RM6.0m as at 1Q17. The improvement in 1Q18 normalised earnings was largely contributed by better cost management and lower depreciation expenses (-41.3%yoy) from the print segment. This is despite a -8.8%yoy decline in the group revenue to RM109.0m in light of lower revenue contribution from the print and digital segment (-10.7%yoy).

Within expectations. The group’s 1Q18 financial performance kept pace with ours and consensus expectations, accounting for 27.5% and 25.4% of full year FY18 earnings estimates respectively.

Future dividend payment to be capped. The group did not announce any dividend as at 1Q18. However, we are reducing both FY18 and FY19 dividend assumptions to 6sen per share from 11sen per share previously. This is in view of the group’s declining reserves. Note that Star’s 1Q18 reserves stands at RM103.0m, a decrease of -24.7%yoy as compared to 4Q17 reserves of RM138.8m. We view that this would limit the group’s commitment to allocate generous dividend payment.

Target Price. Subsequent to the downward revision in dividend, we are lowering our target price to RM1.04 per share (previously RM1.80 per share) based on dividend discount model (DDM) valuation methodology (Discount rate of 6.1%).

Downgrade to NEUTRAL. While the group start the year on a positive note, we view that there is limited earnings upside moving forward. Star’s earnings would be mainly supported by additional advertising income derived from major sporting events as well as effective cost management initiatives. However, we expect future dividend payment to be limited by the annual earnings capability of the group. This is in view of the declining reserve balance. Meanwhile, there is not much traction on the group’s effort to execute earnings accretive acquisitions. We opine that the longer the delay, the budget allocation for the proposed acquisition would reduce gradually. Given the lack of significant positive catalysts, we are downgrading our recommendation to NEUTRAL from buy previously.

Source: MIDF Research - 17 May 2018