1QFY20 core LATAMI of RM3.8m (-181%) missed expectations as wider top-line weakness could not support operating costs. Demand for physical prints already dampened by accelerating digital adoption is likely to have been further affected by the movement control order. We also believe it may take some time before STAR’s digital platform and data monetisation efforts could compensate for its traditional offerings. For now, the group does not discount acquisitions to accelerate its digital ambitions. We slash assumptions, anticipating losses to persist in FY20/FY21. Downgrade to UP (from OP) with a lower TP of RM0.300 (from RM0.310).

1QFY20 missed expectations. 1QFY20 adjusted LATAMI of RM3.8m is deemed to have missed our/consensus full-year PATAMI estimates of RM7.1m/RM3.2m. The negative deviation was probably due to aggravated losses from the main print and digital businesses, due to lower sales, overwhelming earlier cost savings initiatives. No dividend was declared, as expected.

YoY, 3MFY20 turnover fell by 20% led by the decline in its print and digital segment (-22%), only slightly cushioned by the much smaller radio broadcasting segment (+20%). The weakness in sales continued to be attributed to physical distribution being affected by movement control measures and traditional media outlets being a less preferred choice for advertisers given the more economical and efficient reach provided by digital media. With the fall in top-line, 3MFY20 fell into losses with an adjusted LATAMI of RM3.8m (-181%, 3MFY20 PATAMI: RM4.6m) despite having undergone cost optimization exercises in FY19.

QoQ, 1QFY20 revenue dropped by 14% owing to the drag in the print and digital segment, similarly to the above. Likewise, the overall decline in revenue translated poorly to the bottom-line, leading to an adjusted LATAMI of RM3.8m (-256%, 4QFY19 PATAMI: RM2.4m after adjusting for losses on liquidation of subsidiary).

Seeking shelter. The group remains to be highly dependent on its namesake physical newspaper distribution which looks to be severely affected by movement controls placed to curb the Covid-19 pandemic. That said, this could expedite the acceptance of the group’s paywall subscriptions to the Star Online. Its management has commented that they have experienced a four-fold increase in online viewership. However, we believe it is still a long road ahead before this could meaningfully overcome the declining relevancy of its physical prints. In the meantime, the group could carry out further cost optimization in addition to digital monetization strategies. The group has also expressed intent of utilising its RM300m cash pile for acquisitive opportunities which could accelerate its digitalisation timeline.

Post-results, we revise our sales decline and margin assumptions, leading to earnings revisions of -171%/-113% for FY20E/FY21E. We anticipate both years to be difficult for the group. Though we expect FY21 to see a continuing decline in revenue, we opine further optimization strategies could reduce operating pains. Meanwhile, we also cut all dividend assumptions for now, anticipating the group to prioritise cash conversion during this period. Previously, we forecast for 1.0 sen dividend paid for FY20/FY21.

Downgrade to UNDERPERFORM (from OUTPERFORM) with a lower TP of RM0.300 (from RM0.310, previously). Our valuation is based on a lower 0.30x FY21E P/NTA (from 0.35x) at 1.5SD below mean level. We believe this has sufficiently weighed in the bleak outlook for the group coupled with the lack of dividend prospects in the near-term.

Source: Kenanga Research - 1 Jun 2020