- We reaffirm our HOLD recommendation on Astro Malaysia Holdings, with an unchanged fair value of RM2.89/share, based on a 10% discount to our DCF value.

- Astro reported a net profit of RM114.1mil (+37% QoQ, -7% YoY) for its 1QFY14. The result is within expectations, accounting for 24% of our and consensus FY14F earnings.

- Astro declared a first interim dividend of 2.0 sen/share, higher than the interim dividends of 1.0 to 1.5 sen/share declared previously.

- Its revenue grew by an impressive 14% underpinned by:- (i) increase in pay-TV subscribers by 7% to 3,316k; (ii) ARPU increasing 4% YoY to RM94.2 from RM90.3; (iii) churn rate maintained at 8%; and (iv) an adex growth of 21%.

- EBITDA margin shrank to 34% from 35%, due to higher installation, marketing and distribution costs in relation to customer acquisition, on top of higher content costs. In addition to a higher depreciation of 50% due to higher B.yond boxes swap-out, this has led to a decrease in net profit of 8%.

- Given management’s target to swap out the remaining paytv subscribers to the B.yond STBs by FY14, it has guided that EBITDA margin would be further strained at 30-33% this year.

- However, moving forward, this would potentially lead to an increase in take-up of the value-added services, further boosting ARPU growth.

- Astro’s customer base has increased to 3.6mil, with a higher penetration of Malaysian TV households at 53% (vs. 47% in the same period last year). 93% are pay-TV subscribers (of which 66% of the pay-TV subscribers use B.yond STBs) and the rest are NJOI customers.

- We are positive on Astro, underpinned by its virtual monopoly in the Pay-TV segment in the country, driven by its outstanding content portfolio.

- However, in our view, capex cycle has not stabilised and would only peak in FY15F, suggesting that free cash flow would rise significantly only from FY16F onwards.

- Our forecast assumes ARPU hitting RM98 in FY14F. Wehave assumed DPS of 7.0 sen/share, in accordance with management guidance of a payout policy of 75%. Astro is currently trading at a 33x PE of FY14F.

Source: AmeSecurities