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Investment Research

Company Report

Star Publications (M) Berhad

Date: 2 August 2012

Still directionless
STAR publishing revenue has grown at a very disappointing 1.4% CAGR between 2007-2011 while circulation continues to decline. Furthermore, we have little confidence in management ability to steer STAR through the challenges facing print because management has (1) failed to capitalise on opportunities in the past (2) yet to enunciate a coherent strategy for STAR. However, STAR current price presents some short term opportunities. Firstly, historical DPS of 18 sen provides a floor to downside risk. Secondly, a balance sheet that is net cash provides opportunity for capital management which could potentially range from 34 sen to RM1.25 (we have not imputed this into our FV). Based on DDM, we derived a fair value of RM3.50 for STAR. We have also assigned an Average conviction rating to STAR. Overall, we have a BUY on STAR.

Buy
Fair value Previous FV Share price Yield Capital gain Total return Conviction Stock code Market cap RM3.50 N/A RM3.20 +5.6% +9% +15% Average STAR MK RM2,363m

Robin HU
robin@nonameresearch.com

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Star Needs a Coherent Strategy

Past fumbles and a general lack of direction
Fail to capture opportunities. Star began operations in 1971. 40 years later, STAR is still a one-product company with an estimated 95% of its bottomline still coming from only print. The other segments such as radio, magazines, event management and television are, for all practical purposes, immaterial. Over the years, STAR has failed to capitalise on opportunities numerous times. This is all the more perplexing considering some of these opportunities are clearly within Star core competencies. These opportunities include the following: Online recruitment. Despite being online since 1995, Star failed to capitalise on its presence and move its job ads online. Instead, it was Jobstreet that seized the opportunity and successfully dominates the market with a 80% market share Business daily. Star already has a business segment in its daily. Yet, Star failed to capitalise on this to expand its business publication to serve an untapped segment. This was instead seized by The Edge Malaysia Business radio. Star also failed to expand its presence in the business segment despite having a radio licence. The English business radio niche is now dominated by BFM that was just recently launched in Sep 2008 Malay daily. Star failed to capitalise on the growth in Malay readership. Instead, Media Prima capitalised on this through the rapidly growing Harian Metro. Star then tried to play a failed catch up game with its Mingguan mStar (a malay pullout that comes with its English weekend paper, The Sunday Star)

These foibles indicate a lack of direction and strategy. It appears that management is still deeply rooted around old fashioned ink and paper newspaper and has yet to appreciate of how news is currently being consumed through electronic means such as PC, tablets and mobile phones.

Where is STAR really going with all these mini acquisitions?

Rationale for acquisitions unclear. In April 2011, Star proposed to raise up to RM750m in Commercial Papers and Medium Term Note. In the immediate short term, Star will be raising RM400m split equally between 2011 and 2012. As of 2Q12, RM200m has been raised. Initially, STAR intended to spend up to RM60m on acquisitions in new media assets. For 2011, Star spent RM56.5m to acquire Capital FM, Catcha Media, Li TV, and Red Tomato. However, recently, STAR spent another RM45m to acquire CNM Events Marketing bringing total acquisitions cost to RM101.5m above the initial RM60m target.

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Table 1: STAR mini acquisitions to-date Date 2Q12 4Q11 Acquisition CNM Events Marketing Sdn Bhd Red Tomato Description Event organizer in home and lifestyle exhibitions free Chinese weekly published every Friday in Klang Valley and Penang Operates Li, Life Inspired lifestyle TV channel Online media and advertising Repositioned as women radio channel Total Acquisition RM45m RM1.5m

2Q11 1Q11 1Q11

Li TV Catcha Media Capital FM

RM35m RM5m RM15m RM101.5m

The key issue with these acquisitions is threefold. Firstly, it is unclear how STAR intends to leverage off these acquisitions. The total acquisitions thus far amount to roughly RM100m or slightly half of STAR net income of RM187m. As such, it is unlikely that these acquisitions will contribute much to Star bottomline anytime soon (if at all). Secondly, how does all these acquisitions fit into STARs overall strategy? All these acquisitions are small disparate businesses with no clear value proposition. Why does STAR need to acquire Capital FM when it already has three radio stations? What is the rationale for acquiring CNM Events Marketing when STAR already has its own well established exhibitions such as Star Education Fair and Star Property Fair? The other two micro acquisitions, Red Tomato and Catcha Media, sums up to RM6.5m less than what STAR pays one of its executive director in remuneration for 20111. How could they possibly contribute to Stars performance?

Thirdly, what exactly is the acquisition plan? Is the RM200m from the MTN (expandable to RM750m) just a blank cheque for the STAR management to acquire random businesses? So far, there has been no transparency and accountability on this matter.

In dire need of a coherent strategy

The changing game. In the 40 years since STAR first began operations in 1971, the newspapers business has changed drastically. Iconic publications and book retailers have filed for bankruptcy, large media companies have seen a decline in

One executive director in Star was paid RM6.75m-Rm6.8m in remuneration for 2011

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their market capitalisation and more tellingly, circulation has continued to decline significantly for all major publishers globally. Closer to home, while non-English newspapers circulation is still growing (some very rapidly such as Harian Metro) circulation for English newspaper continues to decline. In particular Star has seen its circulation declined from a high of 323k copies per day in 2007 to 290k copies as at end of 2011.
Figure 1: Star circulation (copies per day)

Source: Audit Bureau of Circulation

What has changed is not a decline in readership. On the contrary, readership has increased. Therefore, the decline in print is not similar to say the decline in demand for sewing machines or Polaroid cameras where consumers actually stop using these products. Instead, the decline in print media is due to the fact that readers are consuming more news/articles but in a different way; digitally and online. The table below briefly highlight how technology has changed the way news is being consumed.
Table 2: Old media vs new media Area Content generation Medium Interaction Timing Distribution method Reach Licensing Old media Editorial team Ink and paper None Fixed schedule Oligopoly/monopoly Typically local Required New media Editorial team and also user created Digital and online with audios/videos Allows commenting, tracking, sharing, saving, linking to other apps/platforms Updated real time Can be generated online by anyone Global Not required

Need a coherent strategy, not band aid solutions. In our view, STAR has not fully embraced new media. Other players have recognised the importance of their digital edition and has continuously innovate and experiment with new online

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business model such as subscription paywall, PAYU, video content, multiplatform linkages and app version of their newspaper. STAR too has launched a number of digital initiatives such e-paper (a digital version of its ink and paper), an Android app, an iPhone app, iSnap and its long standing website. However, these initiatives are implemented in a half-hearted and piecemeal manner. Both the Star mobile app on Android and the Star e-paper on iPhone are badly rated and not well received. There are less than 50,000 installs for each of its Android app. The Star website (www.thestar.com.my) appears to be still stuck in the 90s with no integration with its various different business segments (radio, classifieds, etc), little multimedia and very limited user interaction. Users are restricted to sharing articles only (see Reuters site www.reuters.com for an example of a well-run site).
Figure 2: User review of Star Mobile Android app

Source: Android Market, Aug 2012

Adex decline could be a big problem for the Star. The real income generator for STAR is adex. Adex to circulation split is approximately 80:20 implying that for each dollar of print revenue, 80 sen comes from adex and 20 sen from circulation sales. Furthermore, circulation sales does not translate to the bottomline as it is offset by printing and newsprint cost. On the other hand, adex translates very strongly to the bottomline. This means when adex is growing, STAR experience a disproportionate growth in net income. However, this also works in reverse. When adex declines, STAR will also experience a disproportionate decline in net income. The decline in Star circulation has been highlighted above. However, a decline in circulation is not critical on its own unless the decline in circulation is followed by a decline in adex. So far, it does not appear that adex has declined for STAR but print revenue growth is slowing. As can be seen below, Star publishing revenue grew only 2.3% in 2011 and 1.4% CAGR between 2007-2011. This is very disappointing growth indeed.

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Figure 3: STAR revenue by segment 2007-2011

Source: STAR

Potential for capital repayment

34 sen to RM1.25 capital repayment? As at 1Q12, STAR has RM513m in cash and RM262m in debt leaving it in a net cash position RM251m. As STAR pays out only 80% of its net income, cash will continue to accumulate on the balance sheet. Unless STAR spends more money on acquisitions, STAR is actually in a position to do some capital management and return the excess cash to the shareholder. Based on our estimate, STAR could comfortably return 34 sen to RM1.25 to shareholders.

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Valuation and Conclusion

Valuation method and key assumption
Based on DDM, we derived a fair value of RM3.50 for STAR. At current price of RM3.20, this represents a potential total return of 15% comprising 5.6% dividend yield and 9% capital gain. Some of our key assumptions are: STAR will be able to earn steady state EPS of 26 sen STAR will continue to pay out at least 18 sen in DPS in line with historical No decline in revenue

In 2011, STAR paid out a net dividend of 18 sen off an EPS of 26 sen or a payout ratio of 70%. At historical 18 sen, the dividend yield is already 5.6% at current price of RM3.20.

Key risks
Adex decline. Adex decline can be a significant risk for the STAR. Print media revenue is circa RM800m per year. Assuming that revenue declines just 5% and that most of it translates to bottomline, then net income will decline by RM40m from RM187m or 20%.

Conclusion
STAR publishing revenue has grown at a very disappointing 1.4% CAGR between 2007-2011 while circulation continues to decline. Furthermore, we have little confidence in management ability to steer STAR through the challenges facing print because management has (1) failed to capitalise on opportunities in the past (2) yet to enunciate a coherent strategy for STAR. However, STAR current price presents some short term opportunities. Firstly, historical DPS of 18 sen provides a floor to downside risk. Secondly, a balance sheet that is net cash provides opportunity for capital management which could potentially range from 34 sen to RM1.25 (we have not imputed this into our FV). Based on DDM, we derived a fair value of RM3.50 for STAR. We have also assigned an Average conviction rating to STAR. Overall, we have a BUY on STAR.

nonameresearch.com | 2 August 2012

Historical Statistics
Revenue and Net Income (FYE-Dec)
1,200 1,000 806 800 831 1,062

Payout Ratio (FYE-Dec)

1,068
250% 200%

231%

974

RM m

150%
600 100%

91%
72%

88%

400
200 169 139

75%

145

185

187

50%

0%

2007

2008

2009

2010

2007

2009

2010

2011

2008

Revenue

Net income

Payout ratio

Net Income Margin (FYE-Dec)

25% 21% 20% 17% 15%

EPS and DPS (FYE-Dec)

70.0 60.0

57.9

17%

17%

50.0

15%
10% 5%

sen

40.0 30.0 20.0 10.0

22.9
16.5

25.0
18.8 17.1 19.6 17.2

25.3 18.9

0%

2007

2008

2009

2011

2007

2008

2009

2010

Net income margin

EPS

DPS

Revenue by Segment 2011 (FYE-Dec)

Event management, 183

Circulation (FYE-Dec)
315,000 310,000 305,000 300,000

Others, 8

Broadcasting, 57

295,000

290,000 285,000 280,000

Publishing, 819

275,000 270,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
The Star

2011

2010

2011

nonameresearch.com | 2 August 2012 Rating structure The rating structure consists of two main elements; fair value and conviction rating. The fair value reflects the security intrinsic value and is derived based on fundamental analysis. The conviction rating reflects uncertainty associated with the security fair value and is derived based on broad factors such as underlying business risks, contingent events and other variables. Both the fair value and conviction rating are then used to form a view of the security potential total return. A Buy call implies a potential total return of 10% or more, a Sell call implies a potential total loss of 10% or more while all other circumstances result in a Neutral call.

Disclaimer This report is for information purposes only and is prepared from data and sources believed to be correct and reliable at the time of issue. The data and sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this report. The information and opinions in this report are not and should not be construed as an offer, recommendation or solicitation to buy or sell any securities referred to herein. Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction.