Review

Star Media Group reported a core profit of RM49.4mn (-50.0% QoQ, - 40.8% YoY) for its 9MFY16. Earnings were below ours and consensus expectations at 54.4% and 47.5% respectively. No dividends were declared.

The disappointment stemmed from persistently soft adex numbers and continued losses within its radio and television operations. Print revenues declined 5.0% QoQ. There was a sharp fall in print adex in July, followed by slightly better numbers in August and September. Management expects adex will remain soft for the rest of the year.

Its event, exhibition, interior and thematic (EEIT) fell back into losses. Last quarter’s results were boosted by the partial recognition of license fees for its Transformers China exhibit. We expect the division to return to profitability in the future as more license fees are recognised for its travelling exhibits.

YoY, the fall in profits were mainly a result of its print division. Print revenues fell 13.1% YoY, on account of the weak sentiment. Due to operating leverage, print PBT fell at a faster pace of 38.1% YoY. Print remains the biggest contributor to PBT at 75.2%. Radio (-16.8% YoY) and television (-13.1% YoY) revenue also declined on the back of lower airtime and distribution revenue. Its EEIT division was a bright spot, with a PBT of RM16.3mn vs. losses of RM3.6mn in the previous year. Better results were mainly due to its exhibit business, where it has the rights to operate both Avengers and Transformers exhibits.

Impact

Adjusting for lower than expected print margins, we trim our FY16/FY17/ FY18 earnings by 25.4%/7.9%/8.8%. We expect better FY17 profits, based on an assumed modest recovery in adex and increased contributions from its exhibit business.

Outlook

We remain wary of challenges in its print segment. Adex clarity remains poor due to issues such as the weak ringgit, poor commodity prices and rising cost of living. The consumer sentiment index decreased 5pp to 73.6 in the 3Q2016. We are forecasting a decline in industry adex of 6.5% YoY in 2016 – premised on 1.5x our GDP forecast.

Cityneon is expected to play a larger role in earnings moving forward. It holds the rights to operate both Avengers and Transformers exhibits. In June 2016, it launched a permanent Avengers exhibit at Las Vegas’ Treasure Island Hotel and Casino. Partnering up with the Science Centre Board, it is also currently hosting a travelling exhibit in Singapore. A total of seven planned travelling exhibits are expected to be held at different locations in 2017.

Valuation

We lower our TP for Star to RM1.95/share (previously RM2.15/share) – based on an unchanged PE multiple of 13.0x and CY17 EPS of 15.1sen. While we are leaving our DPS assumptions unchanged at this moment, we do not discount the possibility of downsides. In previous briefings, it was guided that dividends would be dependent on its PBT (-10.1% YoY) level. We have also not imputed potential near term earnings risks from its new OTT venture, dimsum. SELL.

Source: TA Research - 22 Nov 2016