1QFY19 EBITDA was stable yoy as lower content costs lifted EBITDA margin. However, expect content cost to spike up in 2QFY19 with the broadcasting of the Fifa World Cup. This, coupled with a flat ARPU and a shrinking pay-TV subscriber base trend, points to a flattish FY19 core net profit. Astro is a defensive stock, backed by resilient cash flows, undemanding valuation, attractive dividend yield of 6.4% and a potential privatisation exercise. Maintain BUY on weakness. Target price: RM2.21.

RESULTS

• Results within expectations. Astro Malaysia (Astro) reported a 1QFY19 core net profit of RM179.0m (+60.3% qoq, -4.8% yoy), representing 27% and 26% of our and consensus’ FY19 full-year earnings forecasts respectively. Our core numbers exclude a RM4.3m unrealised forex loss due to mark-to-market revaluation of the M3B transponder lease liability. While 1QFY19’s annualised EBITDA is ahead of our FY19 forecast, we deem the results to be in line as we expect higher content cost in 2QFY19 on the back of the upcoming Fifa World Cup.

• Subscriptions continue to drag top-line growth. Revenue fell marginally by 1.1% yoy to RM1,310.9m, primarily attributed to weaker contribution from the subscription segment (- 4.0% yoy) as conversion of the NJOI (subscription-free satellite service which commands a lower ARPU) could not offset lower pay-TV subscription contribution. That said, it was partially offset by: a) higher adex revenue (+5.6% yoy) amid commendable TV adex trend (rising market share), and b) a 35.5% increase in the home-shopping division thanks to the addition of another Malay language-based home shopping channel.

• Lower content cost cushioned impact of higher marketing expenses and finance costs. Amid the ongoing renegotiation of some of its content costs with key providers, Astro has successfully reduced its content costs to 30% of TV revenue (1QFY18: 34%). Consequently, EBITDA margin expanded 0.5ppt yoy to 35.2%. However, a) higher marketing and distribution expenses (+13.0% yoy), and b) increase in interest expense (+45.2% yoy) due to the unrealised forex loss from unhedged non-current balance sheet liabilities, have resulted in a 4.8% drop in core net profit yoy to RM179.0m.

• Significantly lower operating costs lifted 1QFY19 results sequentially. Despite top-line contraction of 5.6% qoq, mainly on seasonally weaker adex contribution, 1QFY19 core net profit surged 60.3% thanks to lower: a) content cost (-13.7% qoq), b) marketing and distribution expenses (-10.0% qoq), and c) admin expenses (-36.7% qoq).

• Declared first interim dividend of 2.5 sen (1QFY18: 3.0 sen), representing a 73% payout ratio. We project a net DPS of 12 sen for FY19 (90% payout ratio), implying a net yield of 6.4%.

STOCK IMPACT

• Potential privatisation on the cards? It was reported that T. Ananda Krishnan, who controls a 40.9% stake in Astro via his private vehicle Usaha Tegas (UT), is weighing the possibility of taking Astro Malaysia Holdings Bhd private after its benign share price performance. We are not ruling out the possibility, considering that Astro was taken private in Jun 10 and thereafter re-listed in Oct 12 at RM3.00/share. Note that when Astro was taken private in 2010, it was valued at RM4.30 a share or RM8.3b and at RM3.00/share when it was re-listed, Astro was then valued at about RM15.75b. Rough calculations also indicate that UT has ample resources to undertake the privatisation exercise, having received at least RM12b in dividends and capital gains (via privatisation and relisting/asset sale) over the past 10 years. Nevertheless, we reckon that the probability of this remains moderate, given UT’s focus outside of Malaysia plus the onerous finances needed for a privatisation.

• ARPU should stabilise in FY19 on 2018 World Cup. Astro’s ARPU dropped for the fifth consecutive quarter to RM99.60 in 1QFY19. Going forward, despite volatility in the economy and expected decrease in its pay-TV subscriber base, we believe Astro’s FY19 ARPU should temporarily improve qoq amid robust subscriber take-ups of sports passes and pack upgrades in tandem with the upcoming 2018 World Cup.

• Not resting on its laurels with its dominance in household penetration. Astro’s household penetration rate stood at 75% as at 4QFY18 with 12,000-13,000 hours of library content. Astro is constantly adding more hours (primarily vernacular content) to its library, indirectly benefitting its over-the-top (OTT) platforms such as NJOI, Tribe and Astro Go, to drive subscriber growth. While it may face challenges in the near term to significantly monetise such services which command lower ARPUs, serious cord-cutting should be farfetched, given that Malaysians spend about 77% of their daily TV viewing on Astro’s local content. Hence, we are not overly concerned and opine that the street is underestimating the potential of Astro’s strong library content and 75% household penetration rate.

EARNINGS REVISION/RISK

• No change to our earnings forecasts. We expect FY19 core net profit to fall marginally by 0.4% yoy to RM675m on the back of a shrinking pay-TV subscriber base and higher content costs (2018 World Cup). Consequently, we expect EBITDA margin to fall 1.6ppt yoy to 31.3%.

VALUATION/RECOMMENDATION

• Maintain BUY with an unchanged target price of RM2.21, based on a -0.5% earnings CAGR in our DCF model, implying 17x FY19F PE and 7.4x EV/EBITDA. We also provide a sensitivity analysis on Astro’s potential earnings CAGR and its implied target price.

Source: UOB Kay Hian Research - 7 Jun 2018