This article first appeared in The Edge Financial Daily on April 21, 2020

Star Media Group Bhd
(April 20, 32.5 sen)
Upgrade to buy with a higher target price (TP) of 52 sen: While Star Media Group Bhd’s business outlook remains clouded by the industry’s structural and cyclical shifts, its share price has fallen by 55% over the last 12 months. At these levels, we believe the company’s share price is overly discounted. 

The stock is now trading below its net cash of 52 sen per share, which also implies that investors are getting its other assets such as property and printing plants for free. For financial year 2019 (FY19), Star paid two sen dividends (implying a 6.25% yield on the current price) from its free cash flow per share of 13 sen. 

Greater traction for its digital transformation and products would be a key catalyst for the stock. While we believe it is still early days, viewership of its dimsum streaming service has increased following the government’s movement control order to contain the Covid-19 pandemic. 

As one of the top English news portals in Malaysia, Star’s digital platforms stand to benefit from trends toward digital advertising expenditure (adex). 

Furthermore, opportunities to cross-sell products across different platforms such as digital, print and radio will entice more advertisers. This can be seen in its digital revenue’s 18% year-on-year growth in FY19 despite the adex slowdown.

We expect key cost savings from lower newsprint cost. The group undertook a cost restructuring exercise in 2018 which saw it cease operations of its printing facilities in the Star Northern Hub and carried out a mutual separation scheme costing around RM28 million. This is expected to translate into RM14 million in annual savings. With print adex still weak, rationalisation of Star’s print business may continue.

We now expect Star to record a RM3.6 million net loss for FY20 (from a net profit of RM6.6 million previously) as slower economic activity weighs on adex. 

Our TP of 52 sen is pegged at its net cash per share.

Key risks to our view include potential new players in the market. New entrants in the market could dilute Star’s circulation as well as its advertising sales. — AllianceDBS Research, April 20