Star’s 1Q20 revenue of RM65.8m (-13.5% QoQ; -20.4% YoY) translated into core LATAMI of -RM3.5m. The results missed ours and consensus estimates of core PATAMI of RM7m/RM3.2m, respectively. Traditional print revenue continued to show weakness and dragged the group into losses after recording positive earnings the past four quarters. We slashed our earnings FY20/21 forecasts to losses of -RM9.9m/-7.2m. Maintain HOLD rating with TP of RM0.41, based on a P/NTA ratio of 0.4x which is roughly -1.5SD below its 3-year mean.

Below expectations. Star’s 1Q20 revenue of RM65.8m translated into core LATAMI of -RM3.5m (QoQ: RM2.5m, YoY: RM2.7m), missed ours and consensus full year profit forecasts of RM7.0m and RM3.2m, respectively. The results shortfall was due to lower-than-expected contributions from print revenue. 1Q20 one-off adjustments include allowance of credit losses (RM625k), forex loss (RM99k) and reversal of allowance of credit losses (RM222k). No dividend was declared.

QoQ. Top line declined by -13.5% to RM65.8m. Star sustained top line growth in event segment (+208.8%) due to low base effect. However, the contributions from other two segments disappointed, with print and radio weakened by -16.6% and - 9.9%, respectively. Subsequently, 1Q20 swung to a core LATAMI of -RM3.5m as compared to +RM2.5m in the previous quarter. The loss recorded was largely due to the decline in revenue from its print segment.

YoY. Revenue dropped -20.4% resulting from print (-22.0%) and event (-45.4%) segments. This was partially cushioned by higher radio revenue (+19.8%) from increase in airtime production and digital sales. Core LATAMI was recorded in contrast with RM2.7m core PATAMI in 1Q19.

Digital. Since the MCO was announced to contain the spread of Covid -19 on 18 March, Star has seen an increase in traffic across the Group’s digital platforms. Management are expecting the digital contribution to still be the main driver for Star’s growth, with focus on new technologies and improvement in analytics. Despite this, we are still cautious in its earnings delivery as the traditional media contribution is falling at a faster rate.

Outlook. The group’s bread and butter traditional print segment suffered negatively, with business marketing expenses slowing down from a weak global economic environment due to Covid-19. Advertisers turned more cautious in their adex spending with preference being towards digital advertising. We opine that group’s non advertising revenue i.e. event and exhibition would not be spared due to the “non social distancing” nature of this business in this pandemic. Their event segments suffered the biggest hit (-45.4% YoY) with most of the events being cancelled or deferred due to the pandemic.

Forecast. Given the results shortfall, we slashed our FY20/21 earnings forecasts to losses of -RM9.9m/7.2m from core earnings of RM7.0m/7.5m previously. These adjustments were made on the basis of lower revenue projection, noting the decline in adex to persist and the economic challenges from Covid-19. We maintain HOLD with TP of RM0.41 (from RM0.39), based on a P/NTA ratio of 0.4x, which is roughly -1.5SD below its 3-year mean as we impute our forecast changes and pegged to FY21 NTA/share. Even though potential total return is 15%, we still remain Hold as we view the outlook for Star Media to remain bleak, due to the Covid-19 pandemic which we believe has thwart cost savings measure made by the group. Though the earnings outlook seems muddy at this juncture, the downside should be supported by its net cash position of RM0.51 per share.

Source: Hong Leong Investment Bank Research - 1 Jun 2020