Astro’s 1QFY20 core earnings of RM186.6m (+0.5%) exceeded both ours and consensus expectations. Lower EBITDA YoY across all segments was offset by lower net finance cost, delivering flattish core earnings. While quarterly dividend payout as lower at 53%, management reassured its commitment for the full year to hit 75%. Raise FY20-21 earnings by 14% to account for material cost savings and lower content cost. Upgrade to BUY with DCF based TP of RM1.67 as we reckon that cost savings can outweigh declining subscription revenue in the near term. Coupled with its 7.2% yield, the risk to reward equation seems tilted to the upside.

Above expectations. Astro’s 1QFY20 revenue of RM1.23bn, translated into flattish (+0.5% YoY) core earnings of RM186.6m (adjusted for unrealised forex loss of RM16m). This exceeded expectations at 31.9% and 30% of ours and consensus full year forecast respectively.

Dividends. Declared first interim dividend of 2sen/share (ex-date: 10 July 2019), translating into a 53% payout.

QoQ. Revenue remained lacklustre, dipping by -9.8% to RM1.23bn. This was mainly attributed to a decrease in subscription revenue (-6.3%) and adex (-26%). Home shopping declined for the first time by -15.5% given subdued consumer sentiment. Nevertheless, core earnings increased by >100% from a low base effect. Recall that Astro incurred RM40.6m unrealised forex loss and RM58m VSS cost in 4QFY19.

YoY. Core earnings remained flattish (+0.5%), as lower EBITDA was mitigated by lower net finance cost. Lower EBITDA by 3.9% was weighed by TV (-3.1%) radio (- 10.3%) and Home shopping by -RM1.1m. TV and radio did not benefit from festive spent for CNY as compared to the corresponding quarter.

Outlook. We view that Astro will be able to mitigate the deteriorating subscription revenue by lowering content cost to 33%-34% of revenue (by focus more on vernacular content and less Hollywood content) and reaping the cost savings benefits from its recent VSS exercise. Over the medium to long term, we believe home shopping segment will able to increase its contribution.

Forecast. We increase Astro FY20 and FY21 earnings by 14% respectively as we impute material savings from cost optimisation efforts and lower content cost. We take this opportunity to introduce our FY22 financial forecast.

Upgrade to BUY. Following our earnings forecast increase, we raise our DCF based TP (WACC: 6.5%, TG: 1%) from RM1.59 to RM1.67. While we acknowledge that subscription revenue is on a declining trend, we reckon that the benefits from cost savings (as evident from the current results) may outweigh this, at least in the near term. Coupled with an attractive dividend yield of 7.2%, we opine that the near term risk to reward equation is tilted to the upside.

Source: Hong Leong Investment Bank Research - 26 Jun 2019