ASTRO’s 1QFY24 results underperformed expectations, dragged by sustained TV subscriber churn and high opex. On the bright side, sequential turn-around was driven by normalization of content costs post FIFA World Cup. In addition, we expect adex to recover in 2HFY24 due to seasonality. We cut our FY24F and FY25F earnings by 30% and 34%, respectively, lower our TP to RM0.66 (from RM0.73), but maintain our MARKET PERFORM call.

Missed expectations. 1QFY24 core net profit came in at 17% and 19% of our full-year forecast and the full-year consensus estimate, respectively. The variance versus our forecast was mainly attributed to higher-than-expected subscriber base erosion and content costs.

Lackluster overall but ARPUs expanded. It was a muted performance in 1QFY24 as TV subscription revenues sustained their multi-year decline due to customer churn. Additionally, adex was also weaker on both QoQ and YoY basis. Nevertheless, moving forward, the company expects ARPUs to recover in 2HFY24 due to seasonality.

On the bright side, TV ARPUs inched up to RM98.7 (YoY: +RM1.30, QoQ: +RM0.50). This was in spite of the boost in 4QFY23 from FIFA World Cup passes sold to non-Sports Pack subscribers. We attribute strong 1QFY24 ARPUs to the upselling of TV packages.

Dust settles post World Cup. QoQ turnaround was largely attributed to normalization of hefty content costs incurred during 4QFY23. Recall that FIFA World Cup had then led to a surge in adex, TV subscription revenue and content costs. To a lesser extent, sequential bottomline was boosted by lower taxes and depreciation. We attribute the latter to: (i) one-off accelerated depreciation for legacy platforms, and (ii) extension in life span of set-top boxes.

Sustained weakness in TV adex and subscriptions. YoY weakness was due to the combination of topline contraction and higher opex that more than offset the boost from lower taxes. As highlighted above, earnings was dragged by weakness at the TV segment, whereas the radio segment failed to impress with flattish YoY pretax profits.

Key takeaways from its analyst briefing are as follows:

1. ASTRO is optimistic of its new streaming service sooka’s traction in attracting young subscribers. The company foresees that this would enable ASTRO to expand beyond its legacy base, which mainly comprise the older generation. Hence, the group will focus resources on scaling up this new service.

2. On the same note, the group is sanguine on encouraging take-up for its new broadband offering. This is underpinned by sustained healthy double-digit growth of 28% YoY for Astro Fibre’s customer base (4QFY23: +34% YoY). In 1QFY24, coverage was expanded to reach an additional 118k homes in Sabah via ASTRO’s partnership with Celcom Timur. This adds to the existing 6m homes passed in partnership with Telekom Malaysia.

3. ASTRO believes that earnings for its Home Shopping segment will remain subdued given ongoing headwinds, which include heightened inflation and interest rates. As such, strong earnings achieved during the pandemic era will unlikely to recur moving forward. This corresponds with our FY24F expectations that revenue will be more than halved vis-à-vis FY21 levels

Firing all guns to defend base. ASTRO continues to reinvent itself via transformation plans to match evolving market trends and to defend its Pay-TV subscriber base. Notable recent measures include: (i) implementation of addressable advertising, (ii) investments in technology, (iii) venture into fiber broadband, (iv) new aggregated content offerings (e.g. Netflix, Disney Hotstar), and (v) launch of sooka streaming service. In addition, the above are expected to ease topline pressure emanating from soft adex contribution (FY23: -3% YoY) which emanates from weak consumer and business sentiment due to heightened interest rates and an inflationary environment. 

Cut forecasts. We cut our FY24F and FY25F earnings by 30% and 34%, respectively. This is to reflect higher content costs and a smaller TV subscriber base. Correspondingly, our TP (DCF, WACC: 7.9%; TG: 1%) is lowered to RM0.66 (from RM0.73). There is no adjustment based on a 3-star ESG rating as appraised by us (see page 4).

We continue to like ASTRO given: (i) expected earnings recovery in FY24 as content costs normalize due to absence of major sporting events, (ii) subscriber retention and/or boost from new fiber broadband bundling, and (iii) attractive dividends from highly cash generative operations given subdued capex spend. However, an inflationary environment will likely exacerbate pressure on industry adex spend as well as subscriber retention.

Risks to our call include: (i) weak MYR leading to higher content cost for imported programs, (ii) competition from illegal set top boxes, and (iii) margin pressure due to escalated costs for technology investments to enhance set-top box features

Source: Kenanga Research - 20 Jun 2023