Investment Highlights

• We reiterate our BUY recommendation on Astro Malaysia Holdings (Astro) with unchanged forecasts, but cut our DCF-derived fair value to RM2.12/share from RM3.10 previously. We have raised our discount rate to 9% from 8%, and lowered the terminal growth assumption to 0% from 2%.

• Astro's 1QFY19 core net profit came in within our expectation and consensus at RM175mil, representing declines of 11% YoY and 4% QoQ. The net profit accounted for 22% of our full-year forecast and 25% of consensus estimate. The group declared a dividend of 2.5 sen during the quarter, vs. 3.0 sen in 1QFY18. This is in line with our expectations of a slight decrease this year.

• Astro’s revenue registered a YoY decline of 1% in 1QFY19 owing to a 6% drop in subscription revenue, offset by increases in home shopping and advertising revenue. The contraction in subscription revenue stemmed mainly from a lower ARPU of RM99.60 in 1QFY19 vs. RM100.80 in 1QFY18 as well as lower package take-up. On the earnings front, the larger decrease is due to a higher interest cost and forex losses arising from unhedged liabilities. Notably, the unhedged portion of the lease of Measat 3b satellite amounted to US$287mil as of 1QFY19.

• During the quarter, Astro recorded commendable TV adex growth of 17% YoY as it garnered a higher market share of 44% in 1QFY19 vs. 39% in 1QFY18. On the other hand, the group’s radex fell 6% YoY as its market share shrank to 69% in 1QFY19 from 76% in 1QFY18, despite radio listeners increasing to 16.5mil from 15.6mil. Overall, the group’s adex revenue expanded 6% YoY, outperforming Malaysia’s overall adex growth of -1%.

• In Go Shop, revenue surged 35% YoY in 1QFY19 as the group’s tactical marketing campaigns translated into higher sales volume. In addition, the number of registered customers increased to 1.4mil in 1QFY19 from 1.0m in 1QFY18. The division’s PBT margin has narrowed to -3% this quarter vs. -10% in 1QFY18. We expect the division to break even by the end of FY19.

• Moving forward, the operating environment remains challenging for Astro due to cheaper alternatives offered by strong over-the-top (OTT) players (e.g. Netflix), which pressure subscriptions and ARPU. In addition, the group’s digital platforms such as Tribe and Tamago have yet to gain traction and hence, their revenue contributions are immaterial. Nevertheless, Astro appears undervalued with a forward PE of 12x vs. its 1-year historical average of 23x. Expected dividend yield is also attractive at 7% per annum.

Source: AmInvest Research - 7 Jun 2018