Challenging Environment Ahead

We remain cautious on Astro as the operating environment remains unfavorable mainly due to the weak consumer sentiment and emergence of various online/digital platforms. However, we expect Astro to continue to cement its pay-TV dominance in Malaysia in view of its vast array of premium content and sticky customer base. We reaffirm our HOLD call with a lower DCF-derived 12-month TP of RM2.08.

ARPU Growing at Slower Rate; Pay-TV Subscriber Base Shrinking

Astro pay-TV subscriber base declined for the first time in FY17 (-0.08m, or -2.3% yoy) to 3.47m. As at 9MFY18, the number of pay-TV subscribers had shrunk to about 3.3m, and we expect it to fall even further due to higher churn from increased competition in the space. In terms of ARPU, Astro recorded only a marginal increase of RM0.30 to RM100.70 in 3QFY18, attributed to the lower take-up rate for premium packages.

Higher Content Cost Expected for FY19

Of Astro’s content costs, 70% is foreign currency-denominated while the remaining 30% is in RM. We believe that Astro will be negatively impacted by its hedging policy over the near term given the recent strength of the RM. Moreover, with the upcoming 2018 World Cup, we expect higher content costs and thus expect EBITDA margin to narrow for FY19E.

Piracy, One of the Key Reasons for Churn

Astro’s dominance in the pay-TV space is mainly attributable to its service offering of premium content. Any loss of such content is likely to result in a higher churn rate. We believe that the on-going threats from content piracy, if not sufficiently dealt with, would continue to have a profound impact on Astro’s profitability.

Reiterate HOLD With a Lower Target Price of RM2.08

We revise downwards our FY19-20 earnings forecasts by 8-16% as we are still concerned over the challenging operating environment and declining TV subscription earnings. As such, we lower our DCF-derived 12-month target price to RM2.08, but maintain our HOLD rating on Astro.

Source: Affin Hwang Research - 21 Mar 2018