Investment Highlights

• We downgrade our recommendation to UNDERWEIGHT from HOLD on Star Media Group (Star) with an unchanged fair value of RM0.31/share, pegged to a PB of 0.3x which represents a discount to its 1-year historical PB of 0.4x.
• We cut our FY20F–FY22F earnings and now expect that Star will fall into losses, to account for anticipations of weaker print revenues due to the downturn in adex amid Covid-19 which will likely cause businesses to tighten their adspend and hence lower circulation revenue as customers’ preference for digital content is accelerated.
• Star’s 1QFY20 core loss of RM3.5mil came in below expectations, after excluding net one-off losses of RM0.5mil mainly from allowance of credit losses. The results were disappointing against our full-year forecasts of RM3.3mil profit in FY20F and consensus’ RM3.2mil profit forecast. The variation between forecasts and actual results was due to a worse-than-expected decline in print revenue and Covid-19’s impact on earnings.

• 1QFY20 fell into losses vs. the RM2.7mil core profit in 1QFY19 due to group revenue declining 20% YoY mainly from lower print revenue and higher operating expense ratio of 1.11x (vs. 1x in 1QFY19) likely due to higher expenses relating to the movement control order (MCO).

• Segmental analysis (YoY):

• Print & digital: Revenue dropped 22% leading to an LBT of RM4.5mil in 1QFY20 (vs. RM3.6mil PBT in 1QFY19) mainly due to weak sentiment locally amid Covid-19 as well as the impact of the MCO which worsened revenue losses from 18 March 2020 onwards.

• Radio: Revenue rose 20% due to higher airtime production and digital sales but an LBT of RM0.2mil was recorded in 1QFY20 likely due to higher production costs.

• Event & exhibition: Revenue plunged 45% while PBT tumbled 36% to RM1.0mil in 1QFY20 due to lesser events being held albeit having better cost management.

• Prospects: Despite expectations of a continued challenging operating environment, Star still expects revenue growth from its digital segment. During the MCO, the group did see increased traffic across its digital platforms and will continue its digital transformation and cost minimization efforts.

• Despite cost-cutting measures and net cash of RM398mil with no borrowings, we are concerned on Star’s unexciting prospects as growth in digital revenues would not be able to cushion the accelerated declines in traditional media segments amid weakened global sentiments exacerbated by Covid-19.

Source: AmInvest Research - 1 Jun 2020