This article first appeared in The Edge Malaysia Weekly on September 24, 2018 - September 30, 2018

THE 15th floor of Menara Star is a curious mix of traditional stateliness and technological progress.

Heavy wooden doors, decorated with glass panels and finished in gold, lend an air of old school nobility to the corporate headquarters of Star Media Group Bhd in Petaling Jaya.

The set-up is reminiscent of a lawyer’s office, jokes Roy Tan, the group’s chief operating officer (COO), while tapping his key card to let The Edge team into his workplace.

“I don’t think we need two floors for our corporate offices,” he observes, probably thinking of working the idea into the transformation of the media company.

Its core product is The Star, which still claims to be the most-read English newspaper in the country.

Tan’s office is also decorated with wood furnishings but a screen instead of a white board is mounted on the wall, remotely connected to his tablet and showing a concert by rock band AC/DC.

When Tan apologises for the messy stacks of paper on his desk, we tell him that, from one newspaper company to another, we have seen worse on an editorial floor, or as Star Media calls it, the content department.

“Now everything is on my iPad ... I tell people not to send me anything on paper. But don’t get me wrong, I still read your paper in PDF form,” says Tan in his first media interview, Highway to Hell playing in the background.

Going paperless is not just a step towards deploying more technology, he explains, but also a more efficient way to convey and share ideas.

Tan had joined Star’s digital division in 2013 at the age of 40. The group’s over-the-top video streaming service, dimsum, which was launched in 2016, is considered his brainchild.

Tan has no journalism background but is certainly tech-savvy, and was promoted to his current position from chief digital officer in January this year. Though he is considered rather young for the post by Star standards, the board probably saw in him someone who could drive the transformation of the newspaper group, which is facing the twin threats of the advertising dollar migrating from traditional media and declining circulation — common problems for the print media the world over.

Adding to Tan’s challenges is the waning public confidence in mainstream media, which was seen as the government’s mouthpiece in the past.

When asked about the prospects for the newspaper industry,  Tan says, “I am not one of those gloom and doom guys. I think the [outlook for the print media] business is bright and I think journalism is alive and well. I believe there is an economic model to it and I think it is sustainable.

“It is definitely a hybrid of print and digital. I think that’s what people are looking for and I think that’s what the business is about.

“[Going] digital is part of the transformation and like everything else, it’s not just one thing. I think it is a fallacy to say that it’s a conversion [from print to digital] — it’s not as simple as that. It’s a complex conversation.”

Against the backdrop of declining profitability and digital disruption, Star has merged several divisions, such as print and circulation, and reshaped its revenue team.

It has also established three new divisions, namely product and marketing, technology, and analytics. It is significant that the group has renamed its editorial department as content, which, Tan explains, is meant to boost the longevity of its products.

Tan is proud that Star is the first newspaper group to replace the role of editor-in-chief with that of chief content officer. To him, editors just edit stories whereas content officers create content that suits readers’ needs.

“If you look at content, there are two kinds — news and features. We recognised that news has a short shelf life. Our focus in content is to create products with a longer shelf life,” says Tan, who started his career in the advertising industry.

Since May this year, the structural changes at Star have been rapid, including the downsizing of its workforce — something that few would have expected. According to Tan, the top management began planning for the transformation in December last year.

“We’re keeping an eye on costs, making cuts where it is prudent, rightsizing the business so that we can invest in more areas,” he says.

The remoulding has resulted in significant savings, says Tan, with operating expenditure falling faster than revenue for the first time in the first half of its financial year ending Dec 31, 2018 (1HFY2018).

Signs of bottoming out

Nevertheless, Star’s revenue trended downwards in its last two financial years, dragging profit down with it. This continued in 1HFY2018 — revenue fell 11.6% year on year to RM208.52 million.

Tan, though, is “relatively happy” because the group had expected the decline in revenue to be worse. “In 1HFY2018, we saw a deceleration in the decline [in revenue]. If this [trend continues], we are hopefully seeing a bottoming-out in terms of print,” he says.

Although various factors could upend the situation, Tan is cautiously optimistic. “We expect the deceleration to continue,” he says, adding that this proves the group’s actions are having the desired effects.

“A lot of actions just need to be followed through,” he points out.

Contribution from the group’s digital ventures accounted for 10% of total revenue in 1HFY2018, growing 42% year on year on an absolute basis partly due to the low base effect. According to Tan, the digital contribution is definitely becoming a bigger slice of the pie.

“Anecdotally, we reckon that the profit margin we’re making in digital is a lot better than that in print,” he says, adding that the group’s financial reporting standards do not indicate the breakdown of net profit in the two segments.

That said, he believes the print segment remains Star’s core business — it is still the breadwinner.  But as consumers become more affluent, they will consume more types of media, he says.

Tan likens content to food on a plate. “I’m looking at the food, not the plate. Content is more important than the platform [or the plate] that you use. That’s just how it reaches you as a consumer.”

That being said, there is still the question as to who will pay for the content when there are free offerings in the market.

Star tested the waters by launching StarBiz Premium — paid business news offered on its website — in November last year. The results “were not outside our expectations”, says Tan without elaborating.

Although he declines to share what the group’s strategy is to begin charging for content, Tan says there is an ideology in place and the group plans to implement it “sooner rather than later”.

“I think we’re not going to approach it in the traditional sense. I’m not saying that we’re going to put up a pay wall but the way that we approach it needs to be contextualised to the Malaysian domain.”

Finding value for shareholders

Until now, Star has been paying fairly consistent dividends of 15 sen to 18 sen per share despite the tough operating environment.

Last year saw a bumper payout after the group disposed of its 52.51% stake in Cityneon Holdings Ltd for RM360.18 million.

However, it has yet to announce an interim dividend for FY2018, disappointing investors. At an analyst briefing last month, the management floated the possibility of making annual dividend distributions rather than semi-annual.

Analysts watching the stock had anticipated this in March, saying that the weaker advertising expenditure for print and a lower earnings base would result in the group not being able to sustain its dividend payouts.

The long gestation period of its digital ventures may also suppress earnings prospects, says CIMB Research.

Noting that Star’s shareholders have traditionally held on to the stock for its dividend yields, Tan says the group’s intention is “definitely to continue that trend”.

“Will this come at the expense of growth? The answer is no,” he says, adding that future dividends will depend on the group’s operating level.

“We know that every investment we make in transforming ourselves will actually pay dividends in the future anyway. There’s a rate of return that we expect on the investments we make, even internally, in any new venture. That kind of financial discipline is definitely alive and well [at Star].”

The absence of a bumper dividend may have sparked a selldown in Star shares on Bursa Malaysia. The stock slid to a 16-year low of 83.5 sen, down 73.5 sen or 43.4% year to date, leaving the group with a market capitalisation of RM616.1 million.

Last week, the stock closed at a 26.7% discount to the group’s net asset value per share of RM1.14.

Generally, analysts are lukewarm or negative on the media group with five “sell” and six “hold” recommendations, according to Bloomberg data. Ten out of 11 analysts have a consensus 12-month target price of 99 sen.

The investing fraternity is certainly aware that Star is stepping up efforts to transform itself but this will take time to bear fruit. For now, investors may continue to shy away from the stock until concrete results are seen.

Tan does not believe the worst is over for Star but he is unperturbed. When asked when the group’s transformation initiatives will translate into earnings, he says they have already started to do so.

“The 1HFY2018 results weren’t an unplanned outcome. Our financials are already turning around. We’re taking a step-by-step approach because of our size but we are comfortable,” Tan says, adding that he is pleased with the current pace and direction of the business.

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