INVESTMENT HIGHLIGHTS

• Better cost management and lower depreciation expenses keep Star on profitability path

• Nonetheless, recovery in 1H18 financial performance is slower than expected

• No dividend declared for in 1H18

• Maintain NEUTRAL with an unchanged target price of RM1.04

Manage to stay profitable in 2Q18. Star Media Group Bhd (Star) managed to remain profitable in 2Q18 with normalised earnings of RM1.4m. Despite a -15.1%yoy decline in revenue, Star’s 2Q18 financial performance was mainly supported by better cost management efforts and lower depreciation expenses from the print segment. To recall, in FY17, Star made an impairment of its printing assets and carried out a mutual separation scheme and early retirement option.

Below expectations. Cumulatively, 1H18 normalised earnings amounted to RM13.0m. In comparison, Star’s would have posted a loss of -RM10.1m in 1H17 after excluding the earnings contribution from Cityneon. Nonetheless, the recovery in 1H18 earnings came in below ours and consensus’ expectations, accounting for 30.8% and 27.6% respectively of full year FY18 earnings estimates.

Impact to earnings. We are revising downwards FY18 and FY19 revenue contribution from the print and digital as well as the radio segment. In addition, we are fine-tuning our profit margin assumption to better reflect the results thus far. All in, our FY18 and FY19 earnings estimates are reduced to RM34.2m and RM38.8m respectively.

No dividend announced. The group did not announce any dividend for 1H18. Nonetheless, we are maintaining both our FY18 and FY19 dividend estimates at 6sen per share. This translates into annual dividend payment of approximately RM44.0m. We view that the group would still be able to continue its annual dividend payment at this juncture, albeit at a lower quantum, given its cash reserve which remained sizeable at RM309.3m (-35.7%yoy) as at 2Q18.

Target Price. We are maintaining our target price to RM1.04 per share based on dividend discount model (DDM) valuation methodology (Discount rate of 6.1%).

Maintain 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 sports events as well as effective cost management initiatives. Uncertainty from the upcoming implementation of SST would also lead to advertisers adopting a wait-and-see approach. Fortunately, the group’s cash reserve remains sizeable. This would support the group’s annual dividend payment, albeit at a lower quantum. On another note, 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 maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 20 Aug 2018