Astro Malaysia Holdings - Tuning Down

Date: 04/05/2020

Source  :  KENANGA
Stock  :  ASTRO       Price Target  :  0.90      |      Price Call  :  BUY
        Last Price  :  0.91      |      Upside/Downside  :  -0.01 (1.10%)

While ASTRO continues to forge partnerships, we believe the anticipated weakness in economic activity could weigh down on its customer acquisition efforts. A silver lining now from the postponement of mid-year major sporting events is lower content costs but this would eventually be felt in CY21/FY22. We downgrade our call to MP from OP, as it have surpassed our target price of RM0.900 (9.0x FY22E PER). Still, dividend yields of 8-10% might attract some investors.

Economic slowdown could hinder subscribership. Arising from the ongoing Covid-19 pandemic, our economists anticipate our national GDP to decrease by 1.9% in CY20. We believe this might hinder customer acquisition and retainment strategies by ASTRO as customers may reconsider on their subscription commitments. To recap, since last year, ASTRO has partnered with MAXIS to provide broadband-bundled packages with a similar arrangement recently signed with Allo, a subsidiary by Tenaga Nasional. Additionally, ASTRO has collaborated with iQIYI to launch its streaming app to deliver OTT contents from China. That being said, we suspect that this will lead to further migration of its freemium NJOI offerings, which is partly attributed to the group increased household penetration (75% in FY20 from 63% in FY15). Ultimately, this downtrading of sorts could undermine the group’s TV subscription revenue which accounts for c.70% of its top-line. Still, the recently launched Ultrabox which supports a 4k UHD experience could keep the better well-equipped subscribers occupied.

Content factored up. Since the MCO, the group has offered selective channel access to its existing users based on their subscribed packages. Management had previously guided that it may not lead up to meaningful additional costs, though this was based on the premise that the MCO would only last for 4 weeks. More pressingly, the delay of major 2020 sporting events (such as Tokyo Olympics, Euro 2020) would mean that screening rights and costs would only be incurred in 2021 (FY21). While the lower content cost may support FY21 earnings, it would impact FY22 earnings by 22% based on our estimate. Further down the road, the stock could see two consecutive years of earnings weakness with 2022 (FY23) being the World Cup season (if it remains on schedule).

Post-update, we leave our FY21E/FY22E numbers unchanged.

Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged TP of RM0.900. Our target price is based on an unchanged 9.0x FY22E PER (1.5SD below the stock’s 3-year Fwd. average). Although current prices could imply a negative downside, some investors may still favour its stellar dividend yields potential of c.8-11%. However, this could come at the expense of weathering out two consecutive years of softer earnings, as mentioned above.

Risks to our call include: (i) higher/lower-than-expected subscription and adex revenue, and (ii) higher/lower-than-expected content cost and operating expenses.

Source: Kenanga Research - 4 May 2020

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ASTRO 0.91 +0.03 (3.41%) 12,941,800 

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