STAR’s 1QFY24 results disappointed mainly due to cost and topline weakness at the print segment that led to sustained losses. Furthermore, sluggish sales at the property segment did little to help earnings turnaround. We forecast higher losses in FY24F-25F, but maintain our TP of RM0.31 and UNDERPERFORM call.

Print segment continues to bleed. 1QFY24 core net loss of RM0.7m was below our full-year forecast of RM0.2m and the full-year consensus estimate of RM4.7m profit. The underperformance versus our forecast was mainly attributed to higher-than-expected losses at the print, digital & events segment.

Topline growth uplifted by the property segment. STAR’s 1QFY24 topline growth (+3% YoY) was primarily propelled by the property development and investment segment. We attribute this to the launch of the Star Business Hub (SBH) project, combined with higher lease income from STAR’s commercial assets. This more than offset revenue contraction at the other segments (i.e. print and radio).

To recap, the RM130m SBH project comprises warehouses, factories and offices complexes (4 semi-detached and 1 detached) at Bukit Jelutong, Shah Alam. It was launched in 2HFY23, with one semi-detached unit sold to-date. We believe the latter contributed in large part to segmental 1QFY24 pretax profit of RM1.3m at the property division.

However, YoY core net profit sunk into the red (1QFY23: RM1.1m profit) as the print segment sustained its pretax losses since 4QFY23. This was underpinned by weaker segmental revenue amidst higher opex. Furthermore, this was exacerbated by lower PBT contribution (-21% YoY) from the radio broadcasting segment.

High-cost base amidst anaemic topline. We are cautious of sustained core losses at the print segment on the back of topline and cost pressure. According to Nielson data, adex for The Star publication inched up 3% YoY in 1QFY24. However, this did not translate to corresponding topline growth for STAR’s bread-and-butter print segment. Moreover, the group’s cost base remains high despite cost optimization measures implemented in recent years. We believe that its opex burden emanates from expensive newsprint, wire fees, and manpower costs etc.

Forecasts. We project higher losses in FY24F-25F to reflect higher opex for the print segment.

Valuations. Our TP remains largely unchanged at RM0.31 based on 0.4x FY25F P/NTA after the earnings revision, and as we roll forward our valuation base year. This implies a 20% discount versus the historical sector average of its peers (0.5x) to reflect STAR’s negative ROE versus sector leader MEDIA. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain UNDERPERFORM.

Investment case. We remain cautious on STAR due to: (i) continued adex market share decline for newspapers on the back of intense competition with new digital media, (ii) sustained glut in commercial properties allude to weak rental demand for office assets, and (iii) its high cost structure, which includes expensive newsprint costs that weigh on margins.

Key risks to our call include: (i) traction in efforts to transition to digital media and real estate monetization, (ii) earnings turnaround from successful cost cutting measures via its 5-year transformation journey, and (iii) surge in demand for its property development venture.

Source: Kenanga Research - 29 May 2024