Astro’s FY19 core earnings of RM480.5m (-26.5% YoY) came in below ours and consensus full year earnings forecasts. Earnings were weighed by higher finance cost, VSS expense and content cost from FIFA World Cup. Declared dividend of 1.5 sen per share in 4QFY19 bringing FY19 dividend to 9 sen/share. We lower FY20/FY21 earnings by 12%/20% to account for lower contribution from subscription revenue and lower EBITDA margin. Maintain HOLD rating with a lower TP of RM1.59 based on DCF valuation (WACC 6.5%, TG 1%).

Below expectations. Astro registered 4QFY19 results with revenue of RM1.36bn (- 1.5% QoQ, -1.1% YoY) which translated into core earnings of RM42.9m (adjusted for EI comprising of RM75.5m in forex). This brings FY19 core earnings to RM480.5m, (- 26.5% YoY). The core earnings accounted for 82% and 84% of ours and consensus full year forecasts, respectively. Earnings were weighed by (i) higher net finance costs as a result of unfavourable forex movement; as well as (ii) higher expenses associated to VSS (RM83m in 4QFY19) and content. If the VSS cost were stripped out, earnings would been inline with our forecast (96%) and consensus (98%).

Dividends. Declared final interim dividend of 1.5sen/share (ex-date: 10 April 2019), bringing full year dividend for FY19 to 9 sen/share.

QoQ: Revenue fell by -1.1% mainly due to lower subscription revenue (-3.4%), but was partially offset by higher contribution from adex (+7.8%). Subsequently, core earnings dropped by 77% to RM42.9m on the back of VSS cost and increasing net interest expense. EBITDA margin dropped to 28% vs 34% in 3QFY19.

YoY. Revenue fell marginally by -1.5% mainly from lower subscription revenue (- 5.8%), however was mitigated by adex (+4%) and home shopping (+16.2%). Core earnings declined by -26.5% attributable to lower EBITDA (arising from VSS cost) but was partially mitigated by lower net interest expense.

YTD: Revenue fell slightly by -0.9% to RM5.5bn due to lower subscription revenue by -4.7% which was partly offset by increase in home shopping revenue by 29%. Core earnings declined by -26.5% to RM480.5m due to higher net finance, expenses from VSS and content due to FIFA World Cup in 2QFY19.

Outlook. FY19 proved to be a challenging year for Astro as they were impacted by falling subscriber base and piracy issue. Moving forward, management expects revenue to be assisted by its diversification efforts, i.e. its home shopping segment that posted healthy growth in revenue. Content cost is guided to hover around 34-35% of total TV revenue. In addition, future cost savings from its recent VSS should flow back to aid more earnings recovery.

Forecast. Although the results would be inline with the VSS cost added back, we take this opportunity to lower our assumptions on subscription revenue and increase net finance cost. This results to FY20-21 earnings being cut by 12% and 20% respectively.

Maintain HOLD on Astro with a lower TP of RM1.59 (previously RM1.70) based on a DCF valuation using WACC 6.5% and TG of 1%. Despite the ability to defend its adex revenue, we view that Astro’s declining subscriber income has put Astro in difficult position to protect it margins moving forward, though this will not threaten is status as a leading Pay-TV position. We believe the saving grace for Astro comes from dividend commitment, which it currently yielding 7%.

Source: Hong Leong Investment Bank Research - 27 Mar 2019