STAR’s 1HFY24 results came above expectations as progress billings from the Star Business Hub (SBH) project soared. The stronger sales translated to a nearly 4-fold increase in 1HFY24 earnings, driven by the property segment as it turned around from a pretax loss. We now forecast higher FY24F-25F earnings, raise our TP by 44% to RM0.45 (from RM0.31) and upgrade our call to MARKET PERFORM from UNDERPERFORM.

Dramatic multi-fold earnings growth. 1HFY24 core net profit of RM0.7m surpassed both our full-year loss forecast of RM200k and the full-year consensus profit estimate of RM3.9m. The outperformance versus our forecast was likely attributed to higher-than-expected unit sales at SBH.

Star Biz Hub billings soar. STAR’s 1HFY24 topline growth (+16% YoY) was driven by the RM130m SBH project. To recap, the project was launched in 2HFY23 and comprises warehouses, factories and office complexes (4 semi-detached and 1 detached) at Bukit Jelutong, Shah Alam. According to STAR, the project will be completed by 1QFY25, and the group is “on track to achieve its sales target”.

Likely secured more property sales. We estimate that three semi- detached units in SBH have been sold to date, comprising one unit in FY23, and two more units in 2QFY24. Additionally, we estimate that the project reached c.60% completion in 2QFY24, leading to lumpy recognition of new unit sales that correspond with the project's progress. Hence, this likely led to the more than 5-fold QoQ increase in revenue at the property development and investment segment.

Stronger 1HFY24 revenue led to a nearly 4-fold YoY increase in earnings, driven by the property segment as it turned around with pretax profit of RM12m (1HFY24: RM100k loss). Hence, this more than offset 1HFY24 pretax loss of RM6m (1HFY23: RM800k profit) at STAR’s print, digital & events segments.

SBH will anchor earnings. We believe that the group will remain profitable in 2HFY24, on the back of steady property billings from existing SBH sales. Meanwhile, earnings in FY25 are expected to be anchored by sales of the remaining units in SBH. However, STAR’s earnings visibility beyond FY25 remains murky, unless it develops a new property project, or diversifies its earnings via brownfield or greenfield acquisitions. This is plausible given its substantial cash pile of RM353m with zero borrowings.

Forecasts. We raised our FY24F/FY25F earnings to RM10.7m/RM8.5m (from RM0.2m loss/RM3.3m) to account for the assumed sale of an additional one unit of semi-d at SBH.

Valuations. As SBH’s sales gain traction, we believe there is increased likelihood of STAR monetizing its land bank via development of new projects. Recall that the group has valuable industrial and commercial lands in Penang and Perak. Therefore, this also alludes to the possibility of future dividend pay-outs when STAR is able to encash its assets

On the back of this, we raise our P/NTA valuation on STAR to 0.55x (from 0.4x). This implies a 20% premium versus sector average of 0.45x to reflect its quality land bank assets with potential upside to book value. This is given that valuations on its key real estate assets were last conducted back in 1995 to 2004.

Correspondingly, our TP is raised by 44% to RM0.45 (from RM0.31) and we upgrade our recommendation to MARKET PERFORM from UNDERPERFORM. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Key risks to our call include: (i) continued adex market share rout for newspapers on the back of heightened competition with 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 and wire fees that drag on margins.

Source: Kenanga Research - 21 Aug 2024