This article first appeared in The Edge Financial Daily on December 11, 2018
Star Media Group Bhd
(Dec 10, 69.5 sen)
Maintain underperform and target price (TP) of 60 sen: Star Media Group Bhd’s near-term outlook is expected to remain challenging. After its results briefing, we trimmed financial years 2018 to 2019 estimate (FY18-FY19E) earnings by 29% to 36%. With no immediate earnings catalyst coupled with its intention to preserve cash with a likely impact on dividend payment, we are keeping our “underperform” call on the stock, and maintaining the TP of 60 sen.
The ongoing digital-focused transformation plan coupled with a continued change in media consumption behaviours have led to the Star Media Group posting weaker results in the cumulative nine months of 2018 (9M18), where revenue weakened 16% year-on-year (y-o-y) to RM299.6 million with lower earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM24.6 million (-17% y-o-y). The group’s print and digital segment contracted 24% y-o-y to RM258 million in 9M18 as a result of lower performance of the print (-24% y-o-y to RM194 million) and circulation (-4.5% y-o-y to RM42 million) revenues but partially offset by a higher digital division contribution (+19% y-o-y to RM22 million). The segment recorded a lower Ebitda of RM27 million (-38% y-o-y) with margin contracting to 10.4% versus 14.3% a year ago mainly due to widening losses on its over-the-top (OTT) venture — Dim Sum.
A recent tie-up with Norway-based Cxense — a company providing advertising, data management, search, analytics and content recommendation services — would allow the Star Media Group to ride on the latter’s data management platform facilitating automatic capture of data in real time across all devices. Star Media Group intends to use Cxense to provide the group with a holistic view of its sites, content and visitors’ intent.
Star Media Group is set to launch another round of the mutual separation scheme (MSS) in coming months, targeting to trim about 200 staff members and lower its total staff strength to 1,200. The MSS is expected to cost about RM15 million but save RM9 million per annum moving forward. Star Media Group also intends to cooperate with peers to further rationalise its operating expenditure components such as distribution or logistic costs, among others.
Star Media Group expects advertising spend to remain uninspiring in the next few quarters due to advertisers remaining cautious as a result of uncertainties in policies and a change in media consumption behaviour. However, it foresees sentiments to improve in the second half of 2019 as the government’s policies are likely to stabilise by then. The newsprint price has resumed its upward trend, trading above US$700 tonnes presently versus about US$600 tonnes early this year. Management believes the current trend will likely persist in view of the supply shortage globally. The group also plans to expand its Dim Sum OTT services — which currently have about 800,000 subscribers — into regional markets to achieve profit before tax break-even by 2022.
We have trimmed FY18-FY19E earnings by 29%-36% respectively, after imputing lower advertising revenue and a higher newsprint price to US$670 tonnes versus US$600 tonnes previously, and higher operating expenditure assumptions as a result of the MSS plan. We also lowered our FY18-FY19E distribution per share to 1.7 sen to 1.8 sen versus 2.8 sen to 3.4 sen previously, based on a targeted payout ratio of 80% versus 95% previously, to align with management’s intention of preserving cash.
We maintained our “underperform” rating as the group’s bread-and-butter print segment still faces challenges with diminishing advertising revenue. Our TP is maintained at 60 sen, based on targeted FY19 price to net tangible assets of 0.53 times, implying an unchanged minus-two standard deviation below its three-year mean. Key upside risks to our call include higher-than-expected advertising expenditure revenue, and better-than-expected margins following various cost initiative plans. Key earnings downside risks include a persistent weakness in the print advertising expenditure outlook, and a longer-than-expected gestation period for its OTT venture and future mergers and acquisitions. — Kenanga Research, Dec 10