Star Publications - Time for some online catch up! Hold

HOLD
Fair Value RM3.48

Investment Highlights

• We re-affirm our HOLD recommendation on Star Publications, with an unchanged fair value of RM3.48/share, based on a 10% discount to our DCF value – following an analyst briefing yesterday. 
• Star’s 2QFY12 results recently were dragged by lower-thanexpected adex stemming from:- (1) Cutbacks on adex by MNCs and GLCs due to a wait-and-see approach underpinned by speculation on the impending General Election; and (2) Hypermarket advertisers switching to black and white advertising. Circulation revenue also dropped due to:- (1) ePaper bundle promotion at RM260; and (2) New commission scheme for newspaper vendors.
• The ePaper bundling promotion has thus far been a success with 40,000 subscribers to-date. Management targets to achieve 50,000 subscribers by year-end. This does not account for the 25,000 preloaded ePaper in the Samsung devices. Starting next month, the pricing of the ePaper bundle (physical and ePaper) will normalise to RM360 per year, which is the same rate as subscribing to the physical newspaper directly from Star as opposed to vendors at RM440 per year. 
• Given Star’s losing of adex to the online platform over the past five years, it is investing to revamp its online portal, namely, mystarjob and starproperty, whereby classified content will appear both on print and online. We reckon this move is beneficial as it prevents Star from losing business to other online portals and simultaneously, to stay relevant within its core business, print. More importantly, there is a gradual trend moving from print to online and this is likely to persist moving forward. Evidently, Star is adopting an approach to integrate its print and online platforms. 
• As such, operating expense is expected to be increase arising from investments in digital paper and online portals, promotions and discount arising from the ePaper campaign. 
• Star aims to achieve higher circulation numbers as this would in turn further drive advertising revenue. In the long run, Star foresees an increasing trend of readers reading newspaper on smart phones – hence, leveraging on its investment in the digital space. Elsewhere, Star is looking at acquiring strategic media assets. 
• Nonetheless, Star remains as a dividend player and offers a relatively attractive yield of 5.6%, based on our projected DPS of 18sen for FY12F. Management is confident of a consistent dividend payout of at least 60% of earnings. Balance sheet remains strong and cash flow stood at RM495mil as at end-1HFY12. 
• Management reiterates to have presence in the entire media spectrum. Its acquisitions of four media assets last year are expected to break even in three years. Earnings remain muted for now given the challenges to grow topline and bottom line coupled with lack of growth pursuant to capital deployment. This, we believe, will continue in the near term as the acquisitions may take some time to contribute positively to the bottom line.

Source: AmResearch