Despite 9M18 numbers coming in within expectations, the operating environment for ASTRO is expected to get more challenging ahead. Post model update, we reduced our FY18E/FY19E core PATAMI estimates by 2%/16% with lower DCF-driven target price of RM2.90 (WACC: 9.1%; TG: 1%). Downgraded the stock rating to MARKET PERFORM.

In-line. 9M18 core PATAMI of RM566m (+17% YoY) made up 77%/75% of our/consensus full-year estimates. The better YoY growth was mainly driven by the lower-than-expected content cost in 2Q18 (at 28% percentage of TV segment revenue, the lowest since listing) following effective rate negotiations and one-off adjustments. The content cost, however, has returned to the normal run-rate (36% of TV revenue) in 3Q18, partially due to lower TV turnover. Note that the group’s core PATAMI was derived after removing unrealised forex gain (RM23m vs. RM3m in 9M17) due to MTM’s revaluation of M3B transponder lease liability. A third interim single-tier dividend of 3.0 sen was declared (ex-date: 19th Dec), as expected, bringing the total DPS to 9.0 sen in 9M18 (9M17: 9.0 sen).

YoY, 9M18 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 climbed by 2% to RM205m due to the higher number of products sold but still suffered LBT of RM12.1m vs. -RM12.4m a year ago. Group’s EBITDA, meanwhile, improved by 4% with margin enhanced by 190 bps to 34.5% as a result of higher operational efficiency contributed by lower content costs and OPEX. QoQ, revenue weakened by 2% due to decrease in subscription (higher take-up on the lower-end package) and advertising revenue (absence of festive season). Group’s EBITDA, meanwhile, dipped to 30% (vs. 38.9% in 2Q18), no thanks to the lower turnover coupled with higher content costs.

Tougher operating environment ahead. ASTRO recorded a total 5.3m (+0.4% QoQ or 73% household penetration rate) customer base in 3Q18, of which 43% (or c.2.3m) were NJOI customers in contrast to 37% in 2Q18. The higher NJOI take-up rate suggested that subscribers continued to downplay their TV subscription plan and led the group’s TV subscription revenue to record negative sequential growth for three consecutive quarters. The trend, however, is not expected to reverse in the near-term, in our view, judging from the current subdued consumer sentiment. Besides, its 3Q18 ARPU of RM100.70 also came in below management’s earlier guidance (of RM102-RM103, which we believe is due mainly to the higher take-up on the lower-end package) for FY18 while the HOME shopping segment’s turnover target also declined to high RM200m vs.c.RM500m previously.

All about 2018 WORLD CUP for FY19. Moving into FY19, the group is targeting its turnover to climb by a mid-single digit (underpinned by higher take-up of its sport packages; taller HOME shopping contribution and better monetisation on its IP creative contents) but it is also set to incur a higher content cost (35%-36% of TV revenue) as a result of the World Cup event. Its EBITDA margin, meanwhile, is expected to be lower by 3-4% to c.30% in FY19. All in, while the group’s operating environment is facing disruption, ASTRO is set to re-position its business with emphasis towards personalization, mobility and interactivity with customers via: (i) digitalising its legacy business, (ii) rapidly scaling digital ventures via its e-commerce platform, and (iii) collaborative partnership with leading content players.

Lowered DCF-driven TP to RM2.90 (from RM3.00 previously). Post results review, we have reduced our FY18E/FY19E core PATAMI estimates by 2%/16% after cutting turnover by 2%/3% (on the back of lower pay TV subscribers forecast) coupled with higher content and administrative cost assumptions for FY19.

Source: Kenanga Research - 07 Dec 2017