RAM Ratings reaffirms STAR’s debt ratings, maintains stable outlook

Published on 22 June 2012

RAM Ratings has reaffirmed the respective short- and long-term ratings of P1 and AA1 for Star Publications (Malaysia) Berhad’s (“STAR” or “the Group”) RM750 million Commercial Papers Programme (2011/2018) and RM750 million Medium-Term Notes Programme (2011/2026); both facilities have a combined limit of RM750 million in nominal value. The long-term rating has a stable outlook.

The ratings reflect STAR’s dominant market position and solid financial profile. The Group’s flagship daily, The Star, remains the clear leader among local English-language newspapers, supported by its broad circulation and readership bases. STAR’s balance sheet and cashflow-protection metrics have also stayed sturdy. As at end-FYE 31 December 2011 (“FY Dec 2011”), the Group’s adjusted gearing ratio remained strong at 0.25 times (end-FY Dec 2010: 0.10 times) although its borrowings had more than doubled to RM262.53 million to fund its acquisition of media assets and capital expenditure (“capex”). Against its RM493.68 million cash pile that had doubled year-on-year, the Group retained its net-cash position. At the same time, STAR’s adjusted funds from operations debt cover (“FFODC”) stood at a robust 0.84 times, underpinned by its strong cashflow-generating ability.

Meanwhile, the ratings remain constrained by STAR’s susceptibility to economic cycles, its vulnerability to newsprint price volatility and the increasing prominence of other media platforms. It is also exposed to new risks from its recent investments in media assets. To diversify its business profile, the Group had paid some RM55 million in FY Dec 2011 to acquire controlling stakes in a radio station (Capital FM Sdn Bhd), a television operator (Li TV Holdings Limited), and a publisher of Chinese newspaper (Red Tomato Media Sdn Bhd). These assets, which are fairly new businesses, are still in their gestation periods and incurring losses. The Group also lacks experience in the television segment, which is deemed more competitive than its mainstay print business. STAR aims to turn these businesses around in the next 2 years. Nonetheless, as the aggregate losses of these assets are relatively small at less than RM10 million at pre-tax level, they are not expected to be a significant drag on the Group’s near-term financials.

Looking ahead, STAR’s top line is expected to be supported by the organic growth of its publication operations and full-year contributions from its recently acquired businesses. This is despite the moderate showing of its events division amid the global uncertainties. Given that the Group’s newly acquired media assets are still in gestation, it may take some time before positive contributions become visible. Along with the narrower margins of its events business, the Group’s profitability could be diluted. Nonetheless, its overall performance is still anticipated to remain robust.

As STAR has not planned any major capex or acquisition, we expect its financial metrics to stay above average. Even if the Group took on an additional RM100 million of debts per year for investments/acquisitions, its adjusted gearing ratio is envisaged to stay favourable at around 0.3–0.4 times over the next 2 years. Its adjusted FFODC is still anticipated to come up to at least 0.5 times.

“STAR is also envisaged to retain its strong business profile. While the print media’s share of advertising expenditure has been trending downwards amid the rising popularity of other platforms, print will remain relevant to advertisers - at least over the medium term - as it is able to reach the targeted demographics and retains its effectiveness for certain advertisements. Meanwhile, the recent launch of The Star’s e-paper is seen as a measure to extend the shelf life of the newspaper and prop up its circulation numbers. Effective 24 March 2012, the Audit Bureau of Circulation has included digital editions of newspapers and magazines in its circulation data. Given this, The Star is expected to continue appealing to advertisers,” observes Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings.

Media contact

Low Pui San

(603) 7628 1051

puisan@ram.com.my