Period  2Q14/6M14

Actual vs. Expectations  Astro 1H14 net profit of RM213m (-1.8% YoY) came in slightly below ours and the consensus expectations, making up 45% and 46% of ours and the consensus full year estimates respectively (vs. 1H13: 57.5% and 1H12: 50.7%). The key culprits were mainly due to 1) slower consumer sentiment thus leading its pay TV net adds to lower by 16% YoY to 83k in 1H13; 2) higher marketing & distributions costs as well as administrative expenses.

Dividends  As expected, a second interim single-tier dividend of 2.0 sen was declared, bringing YTD net dividend to 4.0sen, representing 1.4% net yield.

Key Result Highlights  YoY, the 1H14 revenue saw a decent growth of 13%, underpinned by the higher revenue growth in the TV segment (+13%) and Radio segment (+15%). The revenue growth in the TV segment was mainly driven by an increased subscription revenue on the back of a higher ARPU of c.RM95 (+3%, driven by the higher take-up in value-added services such as HD and PVR) and higher pay TV subscribers of 3.359m (+83k as of YTD). Meanwhile, the Radio segment’s revenue growth was driven by the consistent strong listenership rating coupled with improved sales tactical campaign, which supported Radex growth. However, the PBT number dropped by 4% as the robust PBT growth in the radio segment (+40%) was offset by the lower PBT in the TV segment (-18%). Delving deeper, the lower TV’s PBT was mainly dragged down by the higher installation, marketing and distribution cost as well as higher depreciation & amortisation charges on the back of the heavy swap-out of B.yond STB in tandem with the aggressive move by the group in B.yond customer acquisition.

 QoQ, the 2QFY14 revenue increased by 6% led by robust growth in Radio segment (+33% due to much higher Radex amidst Hari Raya festival) and TV segment (+5%, contributed by both stable subscription and advertising revenue). However, the PBT lowered by 17% due to higher depreciation and higher net finance costs as a result of heavy swap out of B.yond STB in the quarter.

Outlook  We are disappointed with the slower than expected IPTV subscription (notably, the group had only garnered c.5k subscribers YTD, with c.3k since the official launch of Maxis-Astro IPTV services which was only made up of c.8% of our FY14 assumption for IPTV subscription).

 Coupled with i) the upcoming subsidy rationalisation plan that could slow down the consumer spending; ii) retaliation plan from competitors e.g. carriage of certain BPL matches by TM which corroded the competitive edge of ASTRO being the exclusive BPL content provider.

Change to Forecasts  We have slashed our assumption on IPTV subscription to c.20k (from c.65k) and c.80k (from c.175k) in FY14 and FY15 respectively.

 Consequently, our FY14 and FY15 net profit forecasts have been lowered by 5-6%.

Rating   Downgraded to MARKET PERFORM.

Valuation  Our TP of RM3.31 has been reduced to RM3.14. This is based on a 10-year explicit DCF valuation (WACC: 8.9%, Beta: 1.0, Terminal growth: 1%), and implies a FY14 PER of 35.7x.

Risks  Lower than expected subscriber growth.

 Escalation of content cost.

Source: Kenanga