Astro’s 1QFY20 core net profit of RM184.9m (+0.9% yoy) was above our and street expectations, accounting for 32% and 30% of the respective forecasts. The variance against our forecast was largely due to lower-than-expected content and staff costs. Despite the slightly better results, Astro announced a lower interim dividend of 2 sen as compared to 2.5sen in 1QFY19, which may put our full-year DPS forecast at risk. Despite a higher TP of RM1.50, we reiterate our HOLD call on Astro given the slight downside potential.

Decent Core Earnings But Weakness in TV Revenue Persists

Astro’s 1QFY20 revenue declined by 5.8% yoy to RM1.23bn, mainly due to a decline in the TV subscription (-7.4% yoy) and radio (-11.9% yoy) segments that was slightly cushioned by a marginal increase (+2.4% yoy) in TV advertising revenue. ARPU improved by 1% yoy to RM100.4 (vs RM99.6), which we believe was partly due to higher churn rate of subscribers to the lower-priced Pay-TV packages. After stripping off exceptional items, Astro’s 1QFY20 core net earnings came in above our expectations at RM184.9m (+0.9% yoy), accounting for 32% and 30% respectively of our and street forecasts. The variance to our forecast was mainly due to lower-than-expected operational costs. Astro announced an interim DPS of 2sen per share (vs. 1QFY19: 2.5sen).

Sequentially Better on Lower Operational Costs

On a qoq basis, revenue declined by 9.8% on the back of decreases in contribution from the TV, radio and home-shopping divisions of 8%, 25% and 15% qoq respectively, largely due to a higher base driven by festive spending in the previous quarter. Despite the sluggish top line, core net earnings improved by 26.8% qoq as the EBITDA margin expanded by 4.8ppt, largely due to lower costs associated with staff and content spending. While we expect content costs to be contained as a result of continual price renegotiation with content providers and a focus on vernacular content, we think that there could be further risk to TV subscription revenue, should there be a focus on profitability at the expense of a reduction in quality of its premium content.

Maintain HOLD With a Revised TP of RM1.50

Given the decent 1QFY20 results, largely driven by lower content and staff costs, we revise upwards our core earnings forecasts for FY2020-22 by 9.7-10.6%. The upward revision was mainly to take into account lower operational costs, especially on staff and content spending. Despite the decent set of results, however, we remain concerned over persistent weakness in pay-TV subscriptions as well as a subdued adex in the near term. We arrive at a higher TP of RM1.50 (from RM1.44 previously), based on a 10-year DCF valuation, but given the slight downside potential, we maintain our HOLD call on Astro.

Key Risks

Key upside/downside risks to our call include: 1) higher/lower-thanexpected subscriptions and ARPU; 2) a sharp increase/fall in consumer sentiment leading to a sharp adex improvement/decline; 3) a sharp increase/decrease in contribution from the home shopping segment.

Source: Affin Hwang Research - 26 Jun 2019