Astro’s 9MFY19 core earnings of RM437.6m (-22.8% YoY) came in above ours but within consensus full year earnings forecasts. The stronger-than-expected results were due to lower operating cost. 9MFY19 core earnings decline was dragged by higher content cost from FIFA World Cup. Declared third interim dividend of 2.5sen. We raise our FY19-21 earnings forecast by 14/3/3% to account for lower operating and finance cost. Upgrade to BUY from Hold with a higher TP of RM1.83 based on DCF valuation (WACC 8.4%, TG 1%).

Above expectations. Astro’s 9MFY19 revenue of RM4.1bn translated into core earnings of RM437.6m which came in above ours but within consensus expectations, accounting for 85% and 75% of full year earnings forecasts, respectively. Earnings were helped by lower operating cost.

Dividends. Declare third interim dividend of 2.5sen/share (ex-date: 18 December 2018). 9MFY19 dividend totalled 7.5sen/share.

QoQ: Revenue decreased by 2.3% mainly due to lower subscription revenue as package take up rate and sales decline after FIFA World Cup. However the decline was offset by increase in adex and home shopping sales. Core earnings improved by 196.2% to RM188.4m due to the absence of high content cost from FIFA World Cup, subsequently EBITDA margin improved by 13.8 ppt.

YoY: Revenue fell marginally (-0.9%) due to lower subscription and adex but core earnings improved by 40.3% attributable to lower content cost, license, copyright and loyalty fees for the TV segment and lower marketing cost for the Radio segment.

YTD: Revenue fall slightly by 0.8% to RM4.1bn due to lower subscription revenue (decline in number of pay-TV subscribers) and advertising revenue which was partly offset by increase in home shopping sales, licensing income and sales of programme broadcast rights. Core earnings declined by 22.8% to RM437.6m due to lower revenue and higher content cost from FIFA World Cup (mainly impacting 2Q).

Outlook. Management guided that content cost should normalise and hover around 36% of total TV revenue for the coming FY20. So far, Astro has witnessed encouraging cost savings on contents that were due for renewal. Besides that, home shopping segment has also showed encouraging 33% YoY growth in terms of users and management reckons that GoShop will break even in FY20.

Forecast. We raise our FY19/20/21 earnings forecast by 14/3/3% to account for lower content costs. We upgrade to BUY from Hold with a higher TP of RM1.83 (previously: RM1.77) based on a DCF valuation using WACC 8.4% and TG of 1%. In view of the QoQ results recovery, coupled with the share price fall by about 50% since Jan 2018, we feel there is sufficient buffer to warrant an upgrade in rating to BUY (from Hold). Moreover, we like Astro for its strong position as the only Pay-TV player in Malaysia giving it the most opportunity to ride on the current adex recovery trend. Besides that, the group also pays out very generous dividend which translates to a dividend yield of 8.1%.

Source: Hong Leong Investment Bank Research - 6 Dec 2018