We maintain our OUTPERFORM call with lower DCF-derived TP of RM2.30 (WACC: 9.8%, TG: 1.0%) after taking more conservative growth/margin assumptions following the weaker-than-expected FY18 results. We believe the YTD sharp share price correction had priced-in earnings risks, to a certain extent, and could provide bargain hunting opportunities to yield-seeking and long-term investors.

Missing estimates. FY18 core PATAMI of RM678m (+5% YoY) came in below expectations at 94%/91% of our/consensus full-year estimates. The key deviations on our end were mainly due to lower-than-expected TV segment’s revenue and higher OPEX. Note that, the group’s core PATAMI was derived after removing unrealised forex gain (RM93m vs. RM24m forex loss in FY17) arising from the MTM’s revaluation of M3B transponder lease liability. A fourth interim single-tier dividend of 3.5 sen was declared (ex-date: 10th April), bringing the total DPS to 12.5 sen in FY18 (FY17: 12.5 sen) which implied a payout ratio of 96.3%. The full- year DPS, however, was below our and consensus estimate of 13.5 sen/13.3 sen.

YoY, FY18 revenue dipped by 1%, no thanks to the lower licensing (due to loss of content recovery for sports channel), and subscription revenue (lower package take-up). Its home-shopping segment’s turnover climbed by 11% to RM290m due to the higher number of products sold (mainly driven by the tactical campaigns) but still suffered LBT of RM15.3m vs. RM20.1m a year ago. Despite lower turnover, group’s EBITDA was flat at RM1.8b with margin inching higher by 0.5ppt to 32.9%, thanks to higher operational efficiency contributed by lower content costs. QoQ, revenue weakened by 1% due to decrease in subscription (higher take- up on the lower-end package) but partially cushioned by higher advertising revenue (due to year-end festive season). Group’s EBITDA, meanwhile, dipped to 28% (vs. 30% in 3Q18) as a result of higher impairment of receivables and selling & distribution costs.

Challenging operating environment ahead. ASTRO recorded a total of 5.5m (+3.1% QoQ or 75% household penetration rate) customer base in FY18, mainly supported by NJOI. The higher NJOI take-up rate suggested that subscribers continued to downplay their TV subscription plan, leading the group’s TV subscription revenue to record negative sequential growth for four 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 4Q18 ARPU of RM99.9 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).

All about sport events for FY19. Moving into FY19, ASTRO is targeting to increase its Pay-TV subscription ARPU to RM101 (underpinned by higher take-up of its vernacular and live sports packages as well as better monetisation on its IP creative contents) but incur a higher content cost (at c.36% of TV revenue vs. 33% in FY18) as a result of the major sport events. The group is set to re-position its business with emphasis towards personalization, mobility, interactivity and customer engagement in FY19. It also aims to focus on the signature vernacular's contents (particular Malay and Nusantara) and provides more premium and seamless experience to its subscribers.

Maintained OUTPERFORM but lowered DCF-driven TP to RM2.30 (from RM2.90 previously) after: (i) reducing our FY19E core PATAMI estimates by 7% (on the back of lower Pay-TV segment contribution coupled with higher contents and administrative cost assumptions), (ii) adopting more conservative growth/margin assumptions for FY20-FY28, and (iii) raising our WACC assumptions (from 9.1% to 9.8%) to account for a potential removal from the FBMKLCI component stock list due to its diminishing market capital.

Source: Kenanga Research - 29 Mar 2018