Period  3Q15/9M15

Actual vs. Expectations

 Below expectations. Astro recorded 3Q15 net profit (NP) of RM113.3m (-5% QoQ, +5% YoY), taking its 9M NP to RM379.4m (+13%) which only made up 68% and 69% of our full-year forecast and the consensus, respectively.

 The negative deviations were due to: (i) lower-thanexpected revenue on the back of slower net adds for pay TV households (-69% YTD) as well as (ii) higher-thanexpected cost of sales mainly due to higher professional fees paid for software installation.

Dividends  As expected, a third interim single-tier dividend of 2.25 sen was declared, bringing 1H net DPS to 6.75 sen which implies 92% dividend payout ratio. For FY15, we expect the group to declare a net DPS of 9.9 sen.

Key Result Highlights YoY, 9M15 revenue grew 10%, driven by the TV segment (+10%) and Radio segment (+8%). Delving deeper, the revenue growth in TV segment was mainly driven by much higher “other revenue” (+76% to RM241.2m, which was due to the monetisation of major sports events and movie contents), and further lifted by a steady increase in subscription revenue (+8% on the back of ARPU of RM98.5 or (+3%) and pay TV subscribers of 3.479m or +39k as of YTD, although at a slower pace by minus 69%). Besides, TV adex inched up by 1% with higher adex share (+2ppts to 37%) in the total industry adex. Meanwhile, looking at the Radio segment, revenue growth was driven by the consistent strong listenership rating, which supported Radex growth. At the PBT level, the group registered a broader growth of 17% due to higher other operating income (mainly on the re-lease of transponder T-11 back to MEASAT Satellite Systems, amounted to RM23.6m) coupled with lower marketing & distribution costs.

 QoQ, 3Q15 revenue decreased by 5% dragged down by: (i) negative net adds in Pay TV, which was caused by higher churn rate as customers rebalanced their spending amidst the rising cost of living, and (ii) softer Radex market from the high base in 2Q15 (during the festive season and FIFA World Cup event). PBT decreased by a wider quantum of 21% despite the lower content costs as a percentage of revenue (-5ppts to 33%). The main culprits were due to: (i) a compensation of RM29m for the delayed release of satellite services as well as (ii) increase in professional fees paid for software installation.

Outlook  While we laud Astro’s strategic positioning in providing differentiated content and a diverse range of value-added products and services to retain and capture more customers, we maintain our cautious view for now in light of: (i) the rising cost of living that could slow down consumer spending and translate into slower subscription rate and higher churn as well as (ii) the feel-bad-factor amidst the challenging local economic outlook.

Change to Forecasts    Post-results, we have cut our FY15E/FY16E NP by 9%/4%, respectively, to mainly account for lower net adds in Pay TV subscribers as well as higher cost of sales.

Rating Maintain UNDERPERFORM. Although the group’s subscription business is relatively defensive in nature as compared to other media companies, its current valuation appears to be overstretched (with a FY16 PER of 28x) thus capping its potential upside. Coupled with the lack of re-rating catalysts and challenging industry outlook, we prefer to err on the conservative side for now.

Valuation  Post earnings revision, our DCF derived TP has been reduced to RM2.98 (from RM3.10) 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 24.8x.

Risks to Our Call  Higher-than-expected subscriber growth.

 Better content cost.

Source: Kenanga