KEY INVESTMENT HIGHLIGHTS

• 1H20 financial performance plunged further into the red with normalised losses of –RM26.9m

• Larger fall in revenue attributed by sharp decline in revenue from Print and Digital segment (<-100%yoy)

• Weak adex environment to continue to drag earnings contribution by traditional media platforms

• Digital segment continues to be in focus

• Maintain NEUTRAL with a revised TP of RM0.32

Below expectations. Star Media Group Bhd’s (Star) 1H20 results plunged further into the red with normalised losses of -RM26.9m as compared to a profit of RM3.4m in the corresponding period of last year. This came in below ours and consensus expectations. The group’s dismal financial performance was mainly attributable to the Print and Digital loss before tax (LBT) of -RM25.4m, a <-100%yoy decline from a profit before tax (PBT) of RM3.1m during 2QFY19 (refer to Table 1 below).

Weak adex environment to continue to drag earnings contribution by traditional media platforms. Due to the huge decline in revenues for the group’s Print and Digital segment, Star’s 2QFY20 revenue fell by -59.5%yoy, which has led to a LBT of -RM27.0m as compared to a PBT of RM1.7m the preceding year. Due to the soft market conditions as a result of the impact of the pandemic coupled with subsequent implementation of the movement control order (MCO), this has further aggravated the revenue loss for the quarter. Moving forward, we postulate that businesses across all major sectors are to continue being cautious on their advertising budget as a way to conserve their cash flow. As a result, we anticipate downward pressure on the group’s earnings given that the group has a high degree of operating overheads.

Digital segment continues to be in focus. We note that the management is targeting for revenue growth from their digital segment as there is an increase in traffic across their digital platforms during the MCO period. However, looking at the earnings contributions made by the digital segment as compared to the traditional media platforms, we remain wary on the prospects of the group’s digital segment as we believe it would not be able to cushion the sharp deterioration in the traditional media revenues in the intermediate-term. On another note, the group’s healthy cash balance of RM370.6m could be utilised to undertake merger and acquisitions opportunities to diversify further the group’s source of income at a faster rate.

Earnings forecast. Given the below-than-expected financial performance this quarter along with persistent negative effects of the Covid-19 pandemic on the adex environment, we are revising downward our earnings forecasts for FY20E/FY21/FY22 to -RM40.5m, -RM28.2m and -RM4.4m respectively.

Target Price. We are revising our target price to RM0.32 (previously RM0.34) based on a dividend discount model (DDM) valuation methodology. This is premised on attaching a higher discount rate of 6.5% (previously 6.3%) on the basis higher uncertainties in the adex environment. However, our estimated dividend per share of 2.0sen remains unchanged, given the group’s still strong cash reserve.

Maintain NEUTRAL. In spite of a larger-than-expected decline in the group’s financial performance this quarter, we postulate that continuous effort to rationalize cost could serve as one of the mitigating factors for further deterioration of earnings moving forward. Aside to that, the group’s healthy cash balance could support to continue to invest in their digital platforms. However, at this point, we remain cautious on its earnings delivery as the traditional media contribution is sinking at a faster rate. Note that, at this juncture, the earnings attributed by the digital segment remains marginal as compared to the group’s traditional media platforms. Moving forward, we foresee the group’s future traditional media segment to continue to be negatively impacted by the weak adex environment as we anticipate most companies are to continue to tighten their pockets as a way to conserve their cash flows against the economic slowdown. On another note, we posit that the group’s healthy cash balance could potentially assist the group to overcome any intermediate-term headwinds. Our estimated dividend yield is +5.7%. All in, we are maintaining our NEUTRAL recommendation on Star

Source: MIDF Research - 28 Aug 2020