ASTRO reported a strong 1H18, mainly driven by lower- than-expected content cost. A second interim single-tier dividend of 3.0 sen was announced, as expected. Post model update, we raised our FY18E/FY19E core PATAMI estimates marginally but keep our DCF-driven target price unchanged at RM3.00. We reiterate our OUTPERFORM call on ASTRO in view of its relatively resilient earnings and decent dividend yields.

A positive surprise. 1H18 core PATAMI of RM430m (+34% YoY) made up 59%/61% of our/consensus full-year estimates. The strong YoY growth was mainly driven by the lower-than-expected content cost in 2Q18 (at 28%, the lowest percentage of TV segment revenue since listing) following effective rate negotiations and one-off adjustments. Despite the strong set of 1H18 numbers, we deemed the results as in- line with our expectation in view of the higher content cost ahead. Note that the group’s core PATAMI was derived after removing unrealised forex gain (RM11.7m vs. RM7.9m in 1H17) due to MTM’s revaluation of M3B transponder lease liability.

A second interim single-tier dividend of 3.0 sen was declared (ex- date: 29 Sep), as expected, bringing the total DPS to 6.0 sen in 1H18 (1H17: 6.0 sen). For the full financial year, we expect the group to declare a total DPS of 13.5 sen, representing a dividend yield of 5.1%. YoY, 1H18 revenue dipped by 2%, no thanks to the lower licensing (as a result of loss of content recovery for sports channel), and subscription revenue (lower package take-up). Its home-shopping segment’s turnover weakened by 4% to RM132m due to decrease in number of products sold. EBITDA, meanwhile, improved by 12% (as a result of higher operational efficiency contributed by lower content costs and OPEX), with margin enhanced to 36.8% vs. 32.4% a year ago.

QoQ, revenue was higher by 7% to RM1.4b on higher advertising revenue (69% to RM120m) contributed by Hari Raya advertising spending. EBITDA, meanwhile, soared by 21% on enhanced margin of 38.9% (vs. 34.6% in 1Q18), thanks to lower-than-expected content costs. The higher EBITDA coupled with a lower effective tax rate led the group to record a higher core PATAMI of RM242m (+29%). ARPU, meanwhile, remained stable at RM100.8. ASTRO recorded a total 5.3m (or 72% household penetration rate) customer base in 2Q18, of which c.36% (or c.1.9m) were NJOI customers.

Outlook. Despite reporting a strong 2Q18 performance, the group is keeping its FY18 targets unchanged aiming to: (i) achieve higher ARPU of RM102-RM103 (driven mainly by digital transformation, monetising NJOY (with higher prepaid take-up rate), capitalize per event sales (i.e. sport event), (ii) achieve zero net adds in its Pay-TV segment (due to cautious mode on spending), (iii) utilize cash capex of c.RM270-280m, and (v) maintain EBITDA margin at c.32%. Its content cost guidance, meanwhile, is maintained at c.RM1.7b (or c.34%-35% of TV revenue) despite recording a much lower number in 2Q18. While management is reluctant to elaborate further, we believe ASTRO is likely to stack up its spending on IP creative contents in the 2H. All in, although the group’s subscription revenue is likely to face some challenging time ahead, the shortfall is expected to be largely offset by the higher advertising revenue.

Maintained OUTPERFORM with unchanged DCF-driven target price of RM3.00. We have raised our FY18E/FY19E core PATAMI estimates marginally by 1%/0.3%, after fine-tuning. We maintain our DCF-driven target price at RM3.00 (WACC: 9.0%, TG: 1%). ASTRO remains our favourite pick in the media sector in view of its relatively resilient earnings and decent dividend yield.

Source: Kenanga Research - 15 Sep 2017