Review

• Star Media Group’s 1HFY19 net profit of RM5.2mn (-59.2%) came below ours and consensus estimates at 38.6% and 35.1% respectively. This was due to surprisingly weak adex during 2QFY19, which pushed it to the brink of losses with net profit at RM1.7mn (-53.2% QoQ, +17.2% YoY).

• Note that while the industry’s traditional adex (excluding Pay-TV) improved 14.8% QoQ due to the Hari Raya Aidilfitri festivities, the group bucked the trend with revenue down 5.9% QoQ on lower contributions from the print as well as event and exhibition segments. By segment, only the print and digital segment was in the black while the radio and event and exhibition segments were in the red.

• In the larger scheme of things, the group, which is still reliant on traditional adex, remained challenged by the structural shift in media consumption from traditional to digital platforms as well as poor business and consumer sentiment, which caused 1HFY19’s revenue and net profit to fall 23.1% and 59.2% to RM160.3mn and RM5.2mn. All segments suffered with the decline in absolute terms led by print and followed by radio and event and exhibition. While digital revenue grew 22%, note that contributions are still smallish, accounting for <10% of revenue.

• Meanwhile, the group’s balance sheet remained strong with a net cash position of RM347.8mn or 47.1sen/share (+2.5% QoQ, +13.1% YoY).

Impact

• In view of the group’s weaker-than-expected adex, we have lowered our adex assumptions and correspondingly cut FY19/FY20/FY21 earnings estimates by 38.7%/35.4%/34.4% to RM8.3mn/RM9.4mn/RM9.9mn.

Outlook

• We expect the continued downtrend in traditional adex to weigh on the group’s near-term performance as there remains no evident sign of it bottoming out. Note that industry newspaper adex in 1HFY19 fell 19.8%, which is at a heavier pace than 1HFY18’s of 17.7%.

• On a brighter note, traction with the group’s transformation strategy and rationalisation exercises could help cushion the pressure from its core print business. Recall that the transformation strategy among others, involves driving growth from the digital space with initiatives including the employment of analytics for more effective advertising.

Valuation & Recommendation

• Following our earnings cut and pegging to a lower P/BV of 0.5x (previously 0.6x), we arrive at a lower TP of RM0.57/share (previously RM0.69/share). Reiterate Sell as we opine the stock lacks earnings catalyst at this juncture. Key upside risks include accretive M&A’s and the unlock of asset value while key downside risks include an unprecedented decline in adex.

Source: TA Research - 29 Aug 2019