Investment Highlights

• We maintain our HOLD recommendation on Astro Malaysia Holdings (Astro) with a higher fair value of RM1.69/share (previously RM1.66/share), after rolling forward our valuations and updating our discount rate to a WACC of 6% and terminal growth rate of 0%. We fine-tune our FY20F-FY21F forecasts upwards by 2-4% after adjusting our EBITDA margin assumptions across the board.
• 4QFY19 core net profit came in within expectations at RM158mil, bringing FY19 core net profit to RM562mil which exceeds our full-year forecasts by 3% whilst missing consensus estimates by 2%. This is after stripping off one-off net losses amounting RM99mil comprising of: (i) unrealized forex losses of RM41mil, and (ii) one-off mutual separation scheme cost of RM58mil.
• FY19 core profit declined 17% YoY mainly due to: (i) higher content costs from the FIFA World Cup, (ii) higher staff related costs from the mutual separation scheme, (iii) higher merchandise costs, and (iv) higher net finance costs due to unfavorable forex movement arising from unhedged finance lease liabilities and vendor financing as well as higher interest expenses on borrowings and finance lease liabilities. The aforementioned declines were offset by lower tax expenses.

• FY19 revenue marginally fell by 1% as falling subscription and advertising revenues were offset by higher merchandise sales and licensing income (Exhibit 2). Meanwhile, Astro’s overall advertising income declined 5% YoY vs. overall industry adex decline of 2% YoY. The group currently commands a 5% share of digital adex, a 44% share of radex and a 76% share of TV adex respectively in FY19 (Exhibit 3).

• Segmental analysis:

• TV segment revenue and PBT declined by 2% and 43% respectively mainly due to decreasing subscription revenues from lower package take-up and higher content costs for the FIFA World Cup. Pay-TV ARPU remains stable at RM99.9 while TV household penetration rose by 2ppt to 77% in FY19.

• Radio segment not spared from soft adex environment as revenue and PBT also fell by 9% and 10% respectively, despite declines being mitigated by group-wide cost saving initiatives.

• Home shopping is the only segment to show improvement as revenue and PBT soared by 29% and 52% respectively, due to higher merchandise sales driven by campaigns to capitalize on the tax holiday and festive celebrations.

• We participated in Astro’s 4QFY19 conference call and came away with the following key focus areas for FY20F:

• Continue to defend its pay-TV subscription revenues through focus on vernacular, live sports and regional.

• Looking to offer more content-broadband bundles: As part of the National Fiberisation and Connectivity Plan (NFCP), Astro had offered a broadband bundle in January 2019 to residents of Jasin, Melaka where Astro has a 92% household penetration of its pay-TV and NJOI customers of the 1,100 homes in the area.

• Offer exclusive rewards and privileges to customers.

• Improve overall customer service and push premium user experience through tech upgrades via improved UI/UX interface which offers a seamless multi-device experience, which is targeted to be ready by mid CY2019.

• We maintain our HOLD call on Astro amid the challenging operating environment due to: (i) competition in the overthe-top (OTT) space from strong players who offer cheaper alternatives e.g. Netflix continue to pressure subscriptions, and as ii) content piracy and illegal TV set-top boxes remain a major threat to the pay-TV industry despite recent developments in the local industry to combat piracy. Furthermore, we believe its positive prospects driven by its 77% TV household penetration rate in FY19 and continued focus on its vernacular content proposition have been fairly priced in.

Source: AmInvest Research - 27 Mar 2019