Despite the economic recovery in Malaysia since the relaxation of Covid restrictions, Astro’s subscription and advertising revenues still disappointed. With more economic headwinds ahead, consumer demand is also expected to remain muted. Nonetheless, we are positive on Astro’s initiatives to transform itself from a traditional cable-TV operator into SVOD service aggregator and ISP. When economic headwinds clear, the group’s current initiatives could bear fruit, indicating an inflection point and provide a turnaround for the group’s earnings. Maintain BUY with a lower DCF-based TP of RM1.15 (WACC: 8.6%, TG: 0%). In addition, Astro currently provides an attractive dividend yield of 9.6%.

We Hosted a Meeting With Management Recently With the Following Key Takeaways:

2QFY23 recap and 2H22 outlook. Astro’s 1H22 core PATAMI declined 11.5% YoY to RM231.1m, which came in below our and consensus expectations. The results shortfall was mainly due to weaker-than-expected adex and subscription revenues. Despite the recovery in Malaysia’s economic activities and strong job market, subscription revenue continued on its downward trend. When combined with lower-than-expected adex, the sustained decline of Astro’s home shopping segment as well as a disappointing dividend payout in 2QFY23, these could be the reasons for the recent selloff of the stock. For 2H22, global economic uncertainties are expected to continue to crimp consumer demand. As consumers become more cautious with their disposable income, Astro’s home shopping segment as well as content subscriptions could be negatively impacted. Moreover, despite the FIFA World Cup happening in Nov 2022 which could lift total TV subscriptions, the higher content cost would compress bottom line margins. Nonetheless, we note that besides the World Cup, adex should see a boost in 4QFY23 as advertisers look to capitalize on the festive holiday seasons (Deepavali in Oct and Christmas in Dec).

Advantage of content and fibre broadband. Looking ahead to the future of Astro, one of its main advantages still lies in its content + fibre broadband package. The argument of competitors such as TM having an advantage over Astro through their broadband + content (Unifi TV) package no longer hold as Astro also provides that one bill convenience now, arguably Astro content provides more value. Moreover, with news of streaming services such as Netflix implementing an ad-tier to their platform, it creates a level playing field for Astro as the distinction between SVOD services and Astro’s viewing experience become increasingly indistinguishable. Besides that, Astro has also released fibre broadband for enterprise customers on 17 Oct 2022. We opine that as Astro continues to improve on its services as a reliable ISP, it would be a strong competitor within the space as it also has entertainment content to add, giving it an advantage with more value bundles over regular ISPs. Moreover, the group will also look beyond SVOD services in the future, into services such as music and fitness as Astro looks to reinvent itself from a legacy cable-TV operator into an all-in-one entertainment ecosystem for homes.

Enterprise customers and addressable advertising. Enterprise commercial customers still present an avenue of growth for the group as <2% of commercial customers in Malaysia are subscribed to Astro’s content packages. This is largely due to the widespread usage of illegal TV boxes. With the Copyright Amendment Act gazetted in Feb 2022, we believe that enforcement of the act to criminalize sellers and commercial users of these TV boxes would drive more commercial customers to purchase content packages directly from Astro, driving up its subscription revenue. Should this happen, its addressable advertising which is still at an early stage would be able to grow further as advertisers gain access to more eyeballs (e.g. during the finals of a major sport event at F&B outlets). With <2% of commercial customers as Astro subscribers, the scale of growth of both content + addressable advertising provides another rerating catalyst for the group should the pick-up rate increases.

Forecast. In view of the uncertainties around the global economy affecting consumer demand, we trim our FY23/24/25 forecasts by -8.1%/-13.5%/-11.5%.

Maintain BUY with a lower DCF-based TP of RM1.15 (WACC: 8.6%, TG: 0%) from RM1.28. We believe that Astro’s journey to “own the home” by creating an all-in-one ecosystem for homes is a positive pivot from its legacy image as a traditional cable-TV operator. We are positive on the initiatives taken by the group to be (i) an SVOD service aggregator (with music and fitness services in the future); and (ii) an ISP, which strengthens its value proposition and product offering. When combined with the continued advancement of addressable advertising as its commercial customers increase, it is possible this could stem the decline in its subscription and advertising revenues and present an inflection point for the group.

Source: Hong Leong Investment Bank Research - 27 Oct 2022