KUALA LUMPUR: Maybank Investment Equities Research and AmResearch Sdn Bhd have maintained their “Sell” recommendation on STAR PUBLICATIONS (M) BHD [] at RM3.18 with target prices of RM2.54 and RM2.40, respectively.

Their latest reports issued on June 19 were related to Star's acquisition of 20% of 701 SOU Hong Kong, a new online directory services provider in China for S$5 million (RM12.2 million) from SPH Interactive International (SPH).  701 SOU provides online directory services in China.

Maybank Research said the impact on earnings would not be material and that it was disappointed Star was unable to utilise its cash more effectively.

The other shareholders are SPH (40%), 701 Search (10%), Fung Choi Printing (15%) and Rainbowchina Image Company (15%).

“The acquisition will utilise only 3% of Star's RM361 million net cash as at end-1Q09 and it will not assume additional liabilities.

"No earnings guidance was provided. The company does not expect to generate earnings in its first year of operations but startup losses are unlikely to be material. We maintain our earnings estimates," it said.

Maybank Research said Star viewed the prospects of 701 SOU as promising because the potentially huge Chinese online directory market is virtually untapped, said the research house.

"However, we think Star would be better off seeking immediately earnings accretive investments instead," it said.

"While its cash holdings will enable it to continue paying 21 sen dividend per share (DPS) into the near future which should support its share price, 22 times 2009 price-to-earnings ratio (PER) is rich during this period of weak advertisement expenditure (adex) sentiment while opportunities to utilise its net cash pile more constructively may be lacking," said Maybank Research.

Meanwhile, AmResearch said it was neutral on Star’s acquisition. While the acquisition would provide access to further penetrate the China market and expand in multimedia-related fields, “we do not see it contributing significantly towards Star's earnings in the immediate term given it relatively small size - covering only four cities currently," it said.

"Hence, we are keeping our FY09F-FY10Fs' earnings figures for now," it said.

AmResearch reiterated its Sell rating on Star with unchanged fair value of RM2.40, based on a 10% discount to its discounted cash flow estimate of RM2.70 per share (WACC:11%, TG:1%).

"We expect adex revenue to contract by 7% in FY09F amid the economic slowdown - first year of adex contraction since last 10 years,” it added.

Due to the contraction in earnings, it estimate Star to declare a lower dividend of 14 sen per share in FY09F (payout: 70%) versus 21 sen per share in FY08 (payout: 80%). At current levels, this translated to a decent yield of 4%.

AmResearch said that while Star's strong balance sheet position may provide room for dividend expansion, it did not think it would happen in FY09F as Star would be using the cash to fund its 64%-owned Singapore based Cityneon, which involved primarily in event management services.