INVESTMENT HIGHLIGHTS

• 1HFY19 normalised earnings of RM5.2m (-59.2%yoy) was below with our and consensus expectations

• However, 2QFY19 normalised earnings showed an improvement of +17.2%yoy to RM1.7m in view of better cost management controls

• Dividend yield expected to stay above 5%, underpin by healthy cash reserve

• Earnings slightly revised downward for FY19 and FY20

• Upgrade to NEUTRAL with an unchanged target price of RM0.54

1HFY19 earnings more than halves. Star Media Group Bhd’s (Star) 1HFY19 normalised profit fell by -59.2%yoy to RM5.2m. The earnings results came in below our and consensus expectations as it accounted for merely 39.7% and 35.1% respectively of the full year FY19 earnings estimates. This was mainly due to the group’s dismal financial performance from the print and digital segment whereby the profit before tax dropped by -65.0%yoy to RM6.7m.

However, second quarter business seems improving. The group’s 2QFY19 normalised earnings increased by +17.2%yoy to RM1.7m as a result of higher profit in the Print and Digital segment (P&D) and better cost management controls. The increase in digital revenue by +13.0%yoy in 2QFY19, coupled with prudent cost management has brought the P&D segment to record a higher profit before tax (PBT) of RM3.1m as compared to PBT of RM2.3m in 2QFY18. Moving forward, we opine that the earnings of the group to remain in positive territory in view of the marginal improvement (+0.4ppts yoy) in the EBIT margin on a quarterly basis.

Earnings forecast revised downwards. Nonetheless, we are revising downward our FY19 and FY20 earnings estimates by -8.4% and -2.9% to RM12.0m and RM14.3m respectively as we lower our revenue assumptions, primarily from the print and digital segment and radio segment. This was mainly due to the group’s weaker-thanexpected adex revenue stream and radio ad spending.

Attractive dividend yield. We are maintaining our dividend forecast of 3sen per share for FY19. At current share price, this translates to an attractive dividend yield of 5.2%. We view that the group would be able to maintain its dividend commitment given the healthy cash balance of RM353.1m (+17.7%yoy).

Target Price. We are maintaining our target price of RM0.54 per share based on dividend discount model (DDM) valuation methodology (maintain discount rate of 5.9%).

Upgrade to NEUTRAL. We are encouraged by the group’s ability to remain profitable amidst a tough operating environment whereby advertising expenditure (adex) continues to be subdued. Especially with the changing advertisers’ preference to advertise on digital platforms has been putting downward earnings pressure on the larger traditional businesses of the media sector. Nonetheless, we are comforted with the fact that the group has been able to grow its 1HFY19’s digital revenue by double-digit of +22.0%yoy. In addition, the current dividend yield of 5.2% is appealing at this current juncture for investors looking for dividend-paying stocks. While we are unclear of when dimsum would contribute positively to the bottom line, the Asian-focused streaming platform remains the group’s valuable digital asset to be monetised or possibly partake in any liquidity event in the medium term. All in, we are upgrading our recommendation on the Star Media Group to NEUTRAL (previously SELL).

Source: MIDF Research - 29 Aug 2019