The downtrend in Astro’s pay-TV revenue looks unlikely to wane in the near term, in our view. While we acknowledge that various new offerings are being rolled out to retain customers, the backdrop of weaker consumer sentiment may be a dampener on discretionary spending. This comes on top of lingering piracy issues which is likely to stay. Taking the aforementioned into consideration, we cut our earnings forecasts by 3-8%, largely to account for further attrition in the pay-TV take-up rate and slightly higher opex especially on marketing expense. Post-revision, we derive a lower DCF-derived TP of RM1.32 and downgrade Astro to HOLD.

Still no sign of weakness waning in pay-TV

We foresee Astro’s pay-TV subscription revenue declining for a fourth consecutive year in FY20, having peaked in FY16 at RM4.36bn. For 9MFY20, TV revenue stood at RM2.74bn (-10% yoy). According to Nielsen Audience Data, there was continued erosion in the share of pay-TV viewers to 55% (vs 57% in 2017) of the total audience. The pay-TV operating environment is expected to remain challenging, with more OTT platforms coming into play on top of still-prevalent illegal Android boxes.

Further cost savings may be capped

For 9MFY20, the EBITDA margin expanded by 7ppt to 37.6% driven by lower marketing and admin expenses on top of cost normalising from a high base. While 9MFY20 saw impressive cost control, it is unlikely to be sustained moving forward. We expect the EBITDA margin to normalise at c.33-34% (from c.35% for FY20E) given the deteriorating top-line coupled with a potential pick-up in marketing spend for its new product offerings.

Downgrade to HOLD with a revised TP of RM1.32

We cut our earnings forecasts by 3-8% for FY20-22, largely to account for further pay-TV attrition and a slight uptick in opex moving forward. Postrevision, we downgrade Astro to HOLD (from Buy) with a lower TP of RM1.32. At 9x FY20 PER (2SD below 5-year mean) we believe Astro is trading in a fair range considering its weaker earnings outlook. Current yields of c. 5-6% for FY20-21E may not present enough appeal given the heightened earnings uncertainty

Source: Affin Hwang Research - 14 Jan 2020