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How to value a company - Star Media

APART from owning media businesses, Star Media Group Bhd and Media Chinese International Ltd (MCIL) have something else in common — their shares are currently trading at a steep discount of over 60% to their respective net asset values (NAVs).

Star Media’s share price has mostly been on a downtrend since 2010. The counter dropped from a high of RM4.20 in March 2010 to 24.5 sen in March 2020 but has since gained ground to close at 32 sen on Monday (March 21). However, at current levels, the share price is still a long way from around RM4 twelve years ago.

The stock is currently trading at a steep discount of 64% to its NAV per share of 88 sen.

As for MCIL, its share price of 16 sen is at a 61% discount to its NAV of 40.65 sen a share as at Dec 31, 2021. The company publishes newspapers including Sin Chew Daily in Malaysia and Ming Pao Daily News in Hong Kong. Its share price has been slipping since 2012.

A check on Bursa Malaysia shows that the two other listed media companies — Media Prima Bhd and Astro Malaysia Holdings Bhd — are trading above their NAV per share.

Media Prima, which closed last Monday at 64.5 sen, was trading 13% higher than its NAV per share of 57 sen.

Astro, at RM1.04 on March 21, was five times higher than its NAV of 20.68 sen per share as at Oct 31, 2021.

Turnaround path

Media analysts believe that investors need more conviction on the turnaround path of these media businesses before deciding to invest in them.

“Their earnings have been on a declining trend because of the ongoing transformation to digital. Everyone is adapting to digital now. This is part of the reason why their share price is such. The publishing media groups need to show a sustainable earnings path moving forward and look at diversifying income,” says a media analyst at a local bank.

“Potentially, with the reopening of economies, advertisers will increase their advertising budgets and that could help to improve earnings moving forward.

“Cost management — which both Star Media and MCIL have done — could help with earnings trajectory too. Newsprint cost, which has been on a rising trend, could impact their cost of production in 2022 despite increased earnings. We do expect a recovery in earnings, but it will be gradual,” the analyst adds.

Another analyst with a local research outfit that covers both stocks says: “As with a lot of stocks trading below book value, a reason for such valuations is because investors are unconvinced about an earnings turnaround.

“When it comes to Star Media, the question I always get asked by clients is about the group’s business prospects and whether they can stop the bleeding of their main printing business. That is a concern that they should address to improve the valuation of the stock,” he adds.

Star Media has been in the red for the past two consecutive financial years ended Dec 31. Factoring in one-off expenses, the group ended FY2021 in a larger net loss position of RM132 million compared with a net loss of RM19.7 million in FY2020.

Stripping out one-off items, loss before tax narrowed to RM25.29 million in FY2021 from RM54.1 million in FY2020.

As for MCIL, the media analyst says the group already has a non-media business — that is, travel — to help buffer the lower earnings from its print business.

“However, in the past two years, the travel business has been hit by the Covid-19 pandemic. Hopefully, with the opening of the country’s borders (from April 1), that segment will start to see revenue again.

“MCIL had become increasingly dependent on its travel agency, which contributed as much as 34% of the group’s pre-tax earnings in FY2020 ended March before Covid-19 hit. Diversified income aside, investors also want to see if the group can plug the losses as it has been in the red for 60% of the past five financial years,” he adds.

In its latest full year ended March 31, 2021 (FY2021), MCIL fell into the red with a US$1.3 million (RM5.5 million) net loss versus a US$7 million net profit a year earlier.

It had reported losses for three financial years between FY2017 and FY2021.

Interestingly, in its latest nine months ended Dec 31, 2021 (9MFY2022), MCIL returned to the black, recording US$1.17 million in net profit versus a net loss of US$3.5 million in 9MFY2021.

Among other factors, this was due to the gradual resumption of economic activities in most of its markets, “efficient cost rationalisation” and measures that cut manpower costs, which mitigated escalating newsprint costs.

Net cash piles

Despite their less than impressive share price performance, both Star Media and MCIL are sitting on net cash piles.

MCIL’s net cash was RM293.6 million (US$70.6 million) as at Dec 31, 2021. This is 9% higher than its market capitalisation of RM269.9 million on March 21.

This means that MCIL’s net cash per share of 17.4 sen at end-December 2021 was 9% higher than its share price of 16 sen.

Its current net cash of US$70.6 million is its highest since it moved into a net cash position in FY2016.

CGS-CIMB Research has an “add” call on MCIL “on grounds of its suppressed valuation and its net cash per share of 17.4 sen at end-December 2021 already surpassing its share price of 16.5 sen as at March 18, 2022”.

“Our 21 sen target price for MCIL values the stock at an undemanding 0.5 times CY2023 forward price-to-book value (P/BV), which is 1 sd below the media sector’s three-year mean,” it notes in a March 21 report.

Meanwhile, Star Media’s total net cash of RM343 million is 48% higher than its market cap of RM231.93 million on March 21. This means that its net cash per share of 47.3 sen is 48% higher than its share price of 32 sen.

A closer look at its accounts shows that the company also had RM315 million worth of investment properties as well as property, plant and equipment as at Dec 31, 2021 — higher than its market cap of RM231.93 million.

Star Media’s latest annual report, for FY2020, shows that the group’s list of properties had a net book value of RM149 million as at Dec 31, 2020.

The properties, which include local assets as well as those in overseas locations such as London, China and Singapore, were last revalued between 1983 and 2011.

The key for Star Media here, says the analyst, is to successfully monetise its assets.

“They have been talking about unlocking the value of the group’s assets for years now but cited timing as the reason it had yet to do so,” he adds.

In a March 1 report, Hong Leong Investment Bank Research (HLIB Research) notes that Star Media had said it had initiated a move into property development to maximise the value of its land assets.

While this venture may potentially unlock the value of its assets, HLIB Research views property development as non-core and non-synergistic with its media business. This strategy may also entail the hiring of new staff and expertise.

“The group is also on the lookout for merger and acquisition (M&A) opportunities as well as to penetrate new businesses that have a promising outlook,” the local research firm adds.

From FY2016 to FY2021, the media ­giant was in a net cash position of between RM296.71 million and RM478.31 million (see table).

From RM397.86 million in FY2016, its net cash rose to RM478.31 million (FY2017) and fell to RM296.71 million (FY2018), only to increase again in FY2019 to RM385.93 million. It was at RM353.24 in FY2020 and RM343.09 million in FY2021.

CGS-CIMB Research has an “add” call on Star Media, premised on “its distressed valuation of 0.4 times CY2023F P/BV”.

“In our view, this multiple looks compelling for a company that had a net cash of RM343.1 million or 47.3 sen per share as at Dec 31, 2021, or 47.8% higher than its market capitalisation at March 18’s close. It also owns choice real estate assets with a net book value of RM158.8 million or 21.5 sen per share, which it seeks to monetise if opportunity strikes.

“Since 2018, the group has communicated its intention to monetise these properties and land tracts. We believe the delay could have been due to the lethargic property market precluding the group from fetching the market value it wishes for. However, since the properties have not been revalued since they were purchased, we believe that the group could stand to generate considerable gains even [if it were to conduct] a fire-sale exercise. In 2018, our proprietary analysis found Star Media’s real estate came with a combined market value of RM518.7 million, 118.5% higher than Star Media’s market cap,” it adds.

CGS-CIMB Research says catalysts for the company, which is majority owned by the Malaysian Chinese Association with 43.1%, include securing a digital banking licence and a potential general election this year.

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