Astro posted a 9MFY20 core net profit of RM588.5m (+31.7% yoy) largely on higher opex savings, in particular marketing and administrative expenses, on top of costs normalising post the 2018 FIFA World Cup. The result was above our and street’s expectations with the variance to our forecast largely due to lower-than-expected costs. In light of the results, we revise up FY20-22E earnings by 3-8% to factor in the lower opex. Meanwhile, a 9MFY20 dividend of 6 sen came in-line with our expectation. All in, we reiterate our BUY rating based on a higher DCF-derived TP of RM1.65 as the total return of 27% (inclusive of c.6% yield) at current levels remains attractive.

Lower Opex Boosts Earnings, Above Expectations

Astro’s 9MFY20 revenue declined by 10.3% yoy to RM3.69bn, on declines seen across all of the group’s segments. In particular, TV subscriptions were down 9.6%, partly as a result of a continued lower package take-up rate. Positively, the top-line disappointment was largely offset by an expansion in EBITDA margin of 7.2ppt to 37.6%. Apart from content costs normalising post the 2018 FIFA World Cup, we gather that the lowered marketing and admin costs (c.16% vs 18% of 9MFY19 revenue) partly came from the cessation of both of Astro’s OTT platforms - Tribe and Tamago (minimal contribution to revenue) as well as the MSS/VSS exercise carried out as at end-2018. For 9MFY20, core earnings came in at RM588.5m (+31.7% yoy), accounting for 84% and 87% of our and the street’s forecast respectively.

Sequentially Net Profit Was Flattish

On a qoq basis, revenue and net profit were flattish at RM1.22bn (-1.7%) and RM170.8m (+0.8%) respectively. Stripping out one-offs, core net profit stood at RM194m (+8%) for the quarter. Moving forward, we think with continuous streamlining of content costs, for instance: i) cost re-negotiation with content suppliers and ii) increasing focus towards the comparatively cheaper vernacular content which is gaining traction, bodes well in sustaining decent margins in spite of the challenging pay-TV environment. Meanwhile, Astro announced an interim DPS of 2 sen (within our expectation), bringing total 9MFY20 DPS to 6 sen (vs 9MFY19: 7.5 sen).

Maintain BUY With a Higher TP of RM1.65

In light of the better-than-expected 9MFY20 results, we raise our FY20- 22E core earnings by 3-8%. The upward revision is mainly to take into account lower operational costs, particularly on marketing and administrative expenses. Following our earnings upgrade, our DCFderived TP is revised higher to RM1.65 from RM1.62. We reiterate our BUY rating on Astro in view of the attractive 21% upside from current levels, coupled with attractive dividend yields of 5.5-6% over FY20-22E.

Key Risks

Key downside risks to our call include: 1) lower-than-expected subscriptions and ARPU; 2) a sharp fall in consumer sentiment leading to a sharp adex decline; 3) a decline in contribution from the home shopping segment.

Source: Affin Hwang Research - 5 Dec 2019