Period  1Q15

Actual vs. Expectations Below expectations. Astro recorded 1Q15 net profit (NP) of RM128.3m (+15% QoQ, +12% YoY) which made up only 21% and 23% of our and the consensus full year estimates, respectively.

Dividends  As expected, a first interim single-tier dividend of 2.25sen was declared vs. ours and the consensus’ expected FY15 total net DPS of 10.9sen and 9.5sen, respectively. This represents 90% of the dividend payout ratio.

Key Result Highlights YoY, 1Q15 revenue saw a decent growth of 11%, underpinned by the higher revenue growth in TV segment (+11%) and Radio segment (+8%). Delving deeper, the revenue growth in TV segment was mainly driven by an increase in subscription revenue on the back of a higher ARPU of RM97.1 (+3%, driven by the higher take-up in value-added services such as HD and PVR) and higher pay TV subscribers of 3.470m (+28k as of YTD). Meanwhile, the Radio segment’s revenue growth was driven by the consistent strong listenership rating coupled with an improved sales tactical campaign, which supported Radex growth. At the PBT level, the group registered a narrower growth of 7% despite a decent growth of 11% at the top line. On a closer look, the decent PBT growth in Radio segment was negated by a flattish growth in TV segment which was dragged down by higher depreciation of STB and amortisation of software.

 QoQ, 1Q15 revenue came in flat due to the moderate growth in subscription TV revenue (+2% only given the slower momentum of gross adds and high churn rate) as well as seasonality weakness of advertising revenue in both the TV and Radio segments (-23% and -22% respectively given the seasonal weakness). Despite flattish top line growth, PBT increased to RM168.2m (+32%) mainly due to the decrease in content cost and lower marketing and distribution costs.

Outlook  While we expect FY15 EBITDA margin to normalise to 34.5% (+1.5%) on the back of lower swap out and lower sales and installation costs, we are cognisant on (i) the ongoing subsidy rationalisation plan that could slow down the consumer spending, which might translate into slower subscription rate and higher churn and (ii) the sluggish IPTV subscription (the group had only garnered c.13k subscribers with c.29k in total since the official launch of Maxis-Astro IPTV services).

Change to Forecasts  We have reduced our FY15 net profit forecasts by -8% to account mainly for: (i) lower TV subscription revenue on the back of lower net adds and higher churns in anticipation of slower consumer spending, (ii) higher D&A for the STB and software, (iii) lower marketing & distribution cost in tandem with lower STB swap out and installation.

Rating Downgrade to UNDERPERFORM. Although the group’s long-term prospects look promising, its current valuation appears to be overstretched (with FY15 PER of 32.2x) thus capping its potential upside.

Valuation  Our DCF derived TP has been decreased to RM3.10 (from RM3.14) based on a 10-year explicit DCF valuation with the following assumptions: (i) WACC: 8.8%, (ii) Beta: 1.0, and (iii) Terminal growth: 1%. Our TP also implies a FY15 PER of 28.2x.

Risks to our call  Lower than expected subscriber growth.

 Escalation of content cost.

Source: Kenanga