Astro’s 1HFY19 core earnings of RM249.2m (-42% YoY), came in below ours and consensus expectations, accounting for only 37% of HLIB and consensus full year earnings forecasts, respectively. 2QFY19 was dragged by higher content cost from FIFA World Cup and higher finance cost (result of weaker RM against USD). Declared second interim dividend of 2.5 sen per share. We cut our FY19- 21 earnings forecast by 5-23% to account for higher content and finance costs, reiterate HOLD with a lower TP of RM1.77 based on DCF valuation (WACC 8.4%, TG 0.5%).

Below expectations. Astro’s 1HFY19 revenue of RM2.7bn translated into core earnings of RM249.2m came in below ours and consensus expectations, accounting for only 37% of full year earnings forecasts, respectively. Earnings were dragged by higher-than-expected-content and finance costs.

Dividends. Declare second interim dividend of 2.5 sen/share (2QFY18: 3.0sen). 1HFY19 dividend totalled 5.0 (1HFY18: 6.0) sen/share was also a disappointment.

QoQ: Revenue increased by 8.1% mainly due to higher sales from FIFA World Cup passes and merchandise sales (contributed by Hari Raya). Despite the higher revenue, core earnings plunged significantly to RM63.6m from RM185.6m attributable to lower EBITDA due to higher content cost from FIFA World Cup.

YoY: Revenue remained flattish (-0.2%) attributable to lower subscription and advertising revenues (as advertisers hold back due to tax holiday). However, core earnings plunged by 74.2% due to lower EBITDA as a result of higher content from FIFA World Cup and unfavourable USD/RM exchange rate.

YTD: Despite the 7% surge in TV customer base to 5.6m, revenue fell slightly by 0.7% to RM2.7bn. The lower revenue was due to lower subscription (decline in number of pay-TV subscribers) and advertising revenues. Core earnings plunged by 42.4% to RM249.2m due to higher content and finance costs.

Pay-TV subscription rate continue to dwindle. We roughly estimated that pay-TV subscribers has dropped from 3.5m in 2QFY18 to 3.4m in 2QFY19. We estimate that the bulk of the 7% rise in TV customer base to 5.6m is from NJOI (Figure #3).

Moving into 2HFY19. The exceptionally high content cost should normalise from this point onwards, however, with the more affordable fixed broadband packages, subscription rate for pay-TV is expected to be disrupted significantly by OTT (Netflix, dimsum, etc). As such, we do not see any catalyst for the rest of the year.

Forecast. We cut our FY19-21 earnings forecast by 5-23% to account for higher content cost and higher finance costs. We also take this opportunity to lower our FY19 DPS assumption from 10.5sen/share to 7.0sen/share.

Reiterate HOLD with a lower TP of RM1.77 (previously: RM2.02) based on a DCF valuation using WACC 8.4% and TG of 0.1%. We maintain HOLD as we think that Astro will still remain relevant for it’s reliability on sports content and we like the group’s intention of producing more vernacular content to capture the local and Nusantara market.

Source: Hong Leong Investment Bank Research - 27 Sept 2018