Investment Highlights

• We upgrade our HOLD call on Astro Malaysia Holdings (Astro) to BUY with an unchanged fair value of RM1.66/share, based on a discount rate equivalent to its WACC of 9% and a terminal growth rate of 0% following the recent fall in its share price.

• 3QFY19 core net profit came in line with our expectations at RM178mil, bringing 9MFY19 core profit to RM404mil. This is after excluding unrealized forex losses amounting to RM59mil due to mark-to-market revaluation of M3B finance lease liabilities. The cumulative results account for 74% of our fullyear forecasts and 71% of consensus estimates.
• 3QFY19 improved 31% YoY despite marginally lower revenue mainly due to better PBT of Astro’s TV segment (+11%) amid: (i) lower content costs, (ii) lower licence, copyright and loyalty fees; and (iii) lower impairment of receivables, which were offset by higher merchandise sales costs.
• 3QFY19 more than tripled QoQ as 2QFY19 was impacted by higher content costs from the 2018 FIFA World Cup which was offset by higher tax expense. Meanwhile, revenue fell 2% due to lower subscription revenue and licensing income and the fact that 2QFY19 benefited from sales of FIFA World Cup passes. This was despite increased advertising expenditure (+11%) attributed to telcos and new device launches in 3QFY19.

• 9MFY19 profit dropped 29% impacted by: (i) higher content costs from the FIFA World Cup, (ii) higher merchandise costs; and (iii) higher finance costs from unhedged finance lease liabilities and interest expenses for borrowings and finance lease liabilities. 9MFY19 revenue slid 0.8% as the increase in merchandise sales, licensing income and sales of programme broadcast rights were offset by lower subscription and advertising revenue. Although overall advertising revenue fell 7%, Astro’s digital adex grew 42% vs. industry growth of 18%. The group has a YTD adex share of 43%, 74% and 4% for TV, radio and digital respectively.

• Segmental analysis:
  • TV: Revenue and PBT declined by 2% and 48% respectively due to lower subscription and advertising revenue amid the softer adex environment post-GE14 and higher content costs as mentioned above. YTD TV viewership share stands at 75%, of which 64% is vernacular content.
  • Radio: Also impacted by weaker adex with segment revenue and PBT both declining by 11% YoY despite lower marketing and promotional costs.
  • Home shopping: Highest ever revenue recorded in 3QFY19 at RM98mil, with cumulative revenue soaring 34% YoY as the number of products sold increased, driven by tactical campaigns held during 9MFY19.
• Key updates:
  • Strategic review of business and group structure: Astro CEO-designate Henry Tan shared that the group will undergo cost rationalization exercises including workforce optimization in the coming months, expecting to incur oneoff costs in 4QFY19.
  • Cessation of Tribe and Tamago: As a results of Astro’s strategic review, the group has decided to cease operations of its regional over-the-top (OTT) platform Tribe and its live streaming app Tamago in light of difficult monetization due to a challenging operating environment.
  • Meanwhile, the commercial rollout of the group’s 4K ultra high definition (UHD) offerings and improved interface to allow for content discovery, mobility and portability for Astro PayTV and AstroGo is set for 1QFY20.
• We upgraded Astro to BUY after its share price declined 22% since the announcement of weaker 2QFY19 results in late September 2018. We believe the current share price is undemanding, trading at 12.8x PE which is more than 1SD below its 4-year historical average PE of 25.0x and offers an attractive dividend yield of 8-9% p.a. On top of anticipated cost savings from its strategic review exercise, a potential catalyst would be the possibility of privatization by its key shareholder or merger opportunities.

Source: AmInvest Research - 6 Dec 2018