KEY INVESTMENT HIGHLIGHTS

• 9MFY20 normalised losses deepened to -RM55.0m, which fell short of our and consensus expectations

• Weak adex environment to continue to drag the group’s losses

• Digital segment remains in focus

• Deeper loss forecasts for FY20 and FY21 at -RM80.6m and - RM33.5m respectively

• Maintain NEUTRAL with a revised TP of RM0.30

Earnings remain in the red. Star Media Group Bhd’s (Star) 9MFY20 results plunged further into the red with normalised losses of - RM55.0m, as compared to a profit of RM6.2m in the corresponding period of last year, which came in below our and consensus expectations. To note, we have excluded a one-off compensation income of RM50.5m for the late delivery of vacant possession of the investment property under construction (“IPUC”) from Jaks Island Circle Sdn Bhd (“JIC”).

Weak adex environment to continue to drag the group’s losses. The group’s results shortfall was attributable to lower-than-expected contributions from all segments, with decline in PBT of <-100% as compared to 9MFY19 (please refer to Table 1 below). Due to the soft market conditions coupled with the effects of Covid-19, this has further aggravated the revenue loss for the quarter despite most economic sectors and businesses were allowed to reopen during the RMCO period. Taking all these into consideration, 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 continue to anticipate downward pressure on the group’s earnings given its high degree of operating overheads.

Digital segment remains in focus. We note that Star expects digital revenue to grow despite challenging market conditions and will focus on new technologies and analytics to increase engagement and monetization to drive revenue streams beyond Print. However, we remain wary on Star’s prospects as the traditional media contribution is sinking at a faster rate and not adequately mitigated by its digital earnings growth due to fierce competition within the digital space.

Forecast. Given the continued below-than-expected results along with persistent negative effects of the Covid-19 pandemic on the adex environment, we have deepened further our FY20 and FY21 loss forecasts to -RM80.6m and -RM33.5m respectively.

Target Price. We are revising our target price to RM0.30 (previously RM0.32) based on a dividend discount model (DDM) valuation methodology. The target price is derived from a higher discount rate of 7.1% (previously 6.5%) based on higher uncertainties in the adex environment. However, our estimated dividend per share of 2.0sen remains unchanged, given the group’s healthy cash balance of RM358.2m.

Maintain NEUTRAL. Despite a larger-than-expected decline in the group’s earnings this quarter, we postulate the group’s continuous effort to rationalize cost could serve as a mitigating factor from further deterioration in earnings moving forward. Aside to that, considering that the group has a strong cash reserve and no borrowings, this could act as a solid base for Star to undertake merger and acquisitions opportunities to diversify further the group’s source of income at a faster rate. At this juncture, however, there is not much traction on the group’s effort to execute earnings accretive acquisitions. Thus, given the lack of significant positive catalysts, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 13 Nov 2020