-  We maintain our HOLD recommendation on Astro Malaysia with a lower fair value of RM3.03/share (vs. RM3.08/share previously), based on a 10% discount to our DCF-derived value.

-  We trim our FY14-FY16 earnings estimates by 5%-6%, as results came in below our expectation.

-  Astro recorded a 2Q net profit of RM99mil (-13% QoQ, +5% YoY), bringing 1HFY14 earnings to RM213mil (-2% YoY). This accounted for 44% of our previous estimate, and 46% of consensus.

-  A second interim dividend of 2.0 sen/share was declared, bringing the total payout to 4.0 sen/share to date.

-  1HFY14 topline grew by 13%, on the back of:- (i) an increase of 3% in ARPU for Pay-TV residential subscribers from RM91.80 to RM94.90; (ii) Pay-TV subscribers increasing by 6% to 3.36mil; and (iii) 15% growth in adex revenue.

-  However, this was partially offset by higher content costs of RM65mil, as well as higher customer acquisition related costs by RM31mil. We expect EBITDA margin to remain compressed at 32% in FY14.

-  Additionally, an increase in depreciation by 53% due to its heavy B.yond set-top boxes swap-out this year resulted in a decline in net profit by 2%.

-  However, the successful completion of the swap-outs should see an uplift in ARPU. 74% of its subscribers have converted to HD STBs, while 800k subscribers are still using its SD decoders.

-  Its subscriber base increased by 13% to 3.67mil, with a penetration rate of 54% of Malaysian TV households (vs. 49% in the same period last year). 91% of the subscribers are Pay-TV customers, while the rest are NJOI subscribers that increased more than two-fold YoY to 314k.

-  On its sports content sharing agreement with Telekom’s HyppTV, Astro highlighted that these are only done on commercially sound terms, adding that revenue generated from this agreement will then be reinvested in acquiring more compelling content. Having said that, it will retain its competitive edge by keeping certain content exclusive to its own subscribers.

-  Although we view Astro’s substantial market share in the Pay-TV market in the country positively, we are of the opinion that its significant capex in the next couple years will weigh on its free cash flow.

-  Furthermore, its dividend yield of 2%-3% seems unattractive when compared against its peers of 5%-6% within the sector. The stock is currently trading at a PE level of 32x FY14 earnings.

Source: AmeSecurities