Investment Highlights

• We reiterate our BUY recommendation on Astro Malaysia Holdings (Astro) with an unchanged fair value of RM3.10/share based on DCF at 8% discount rate. We have fine-tuned our FY20F earnings by 0.6% for housekeeping reasons.

• Astro's FY18 core net profit came in within our expectation and consensus at RM771mil, representing a YoY improvement of 21%. For 4QFY18, the group posted a profit of RM182mil, growing 24% QoQ and 25% YoY. The group declared a dividend of 3.0 sen during the quarter, bringing YTD dividend to 12.5 sen, in line with expectations.

• In spite of a slight revenue decline of 1.5%, the improvement in FY18 earnings stemmed from a 4ppts expansion in EBITDA margin, supported by lower cost to serve and content costs. Recall that Astro has embarked on several digitalisation initiatives to improve operational efficiencies, including replacing call centre personnel with chatbots to attend to basic customer queries and moving film storage from physical servers to cloud (Amazon Web Services). These initiatives are estimated to bring about cost savings of circa RM30mil in FY19F and RM40-50mil/year subsequently.

• Meanwhile, the jump in Astro's 4QFY18 earnings was mainly attributed to unrealised forex gain from unhedged liabilities. Notably, the unhedged portion of the Measat 3b satellite lease amounted to US$291milas of 4QFY18. From our estimates, every 0.10 change in the USD/MYR would translate into circa RM30mil in foreign exchange gains.

• On the adex front, FY18 revenue improved 2% YoY as Astro garnered higher market share in both radio (74% in FY18 vs. 73% in FY17) and TV (44% in FY18 vs. 38% in FY17). This defied Malaysia's overall adex decline of 8%.

• Go Shop revenue in FY18 grew 11% YoY as the number of registered customers increased from 956K in FY17 to 1.3mil in FY18. We expect the division to breakeven in FY19.

• Tribe’s user base has rapidly grown to 3.1 million registered users as of 4QFY18. While the contribution to the top line remains immaterial at this juncture, we are mindful that the group could raise its subscription fees in the future to improve ARPU. Leveraging the group's existing content library, Tribe could command handsome operating margins and generate meaningful contributions to the bottom line in the future.

• Moving into FY19, we believe Astro would see improvements in adex due to two notable sporting events this year, namely the PyeongChang 2018 Winter Olympics and the 2018 FIFA World Cup. In our opinion, the events are far more enthralling compared to those of 2017, during which the SEA Games was the only notable event.

• Astro's cash flow from operations improved noticeably, increasing 7% YoY. Stripping out disposal of unit trusts and maturities of fixed deposits, Astro's FCFE yield is currently at 9%, which supports its capacity to pay dividend.

Source: AmInvest Research - 29 Mar 2018