Star Publications - Acquires an event company

News    STAR has acquired CNM Events Marketing S/B (“CNM”), an event organiser company involved in home and lifestyle exhibitions for a cash consideration of RM45.0m. CNM will provide a total profit before tax guarantee of not less than RM30.0m for three years from the completion date of the S&P agreement.

The purchase price is payable to the vendor in tranches. The first payment of RM28.8m is payable on the completion date while the balance of RM16.2m is payable over a period of three years supported by the profit guarantee provided by the vendor.

The rationale for the acquisition is to expand Star’s existing business in the event and exhibition space as well as provide additional revenue streams to the group in the future.

The purchase price of the business acquisition was arrived at on a ‘willing buyer willing seller’ basis and will be funded partially by borrowings as well as internally generated funds.

Comments          We are slightly surprised by the above acquisition given that the group has previously indicated that FY12 will be a year of consolidation for the company instead of M&A activities.

Based on the latest company filing to SSM, CNM has a total asset of RM5.2m with a negative reserve of RM1.6m as at FYE Dec 10. Its revenue was at 8.2m (+71.4% YoY) while the PBT has turned from RM0.3m a year ago to a loss of RM1.6m.

The above acquisition is overpriced in our view given that the purchase price of RM45.0m represents 8.6x of CNM’s total assets. On top of that, the profit guarantee provided by CNM also appears challenging judging from its historical financial performance.

Outlook         Remains cautiously optimistic on adex growth.

Forecast               No changes in our FY12-FY14 earnings forecasts as we do not expect any material earnings contribution from the above acquisition.

Rating   Maintain MARKET PERFORM

Valuation            Our Star’s Target Price of RM3.28 (based on a targeted FY13 forward PER of 13.0x (-1.0 SD) is currently under review pending its upcoming June CY12 adex data.

Risks      Slower than expected June adex may cause us to review our FY12 adex growth assumption, which is currently set at a growth of 11.1%.

Source: Kenanga