Its uninspiring 1H19 report card prompted us to trim our FY19-20E earnings estimate by 26-13%, respectively. The introduction of more affordable and speedy broadband packages is expected to pose a challenge to Pay-TV operator. Downgraded to MAKET PERFORM with a lower DCF-derived TP of RM1.60 in view of intensifying competition ahead.

Below expectations. 1H19 core PATAMI of RM225m (-48% YoY) came in below expectations at 31%/33% of our/consensus full-year estimates. Lower-than-expected subscription and advertising revenues coupled with higher-than-expected content cost and unfavourable unrealised forex movement are the key negative culprits on our end. As expected, the group has declared a second interim dividend of 2.5 sen (2Q17: 3.0 sen) with ex-date set on 11th of October.

YoY, 1H19 revenue weakened by 1%, due to the lower subscription (more lower package taken up) and advertising revenue (slower advertising market) but partially offset by better merchandise revenue. Its home-shopping segment’s turnover climbed by 34% to RM177m due to the higher number of products sold (mainly driven by tactical campaigns) but still suffered LBT of RM7.0m vs. RM9.3m a year ago. Despite lower turnover, group’s EBITDA dipped by 26% to RM750m with margin lower by 93ppt to 27.5%, no thanks to higher content costs from FIFA World Cup and increase in merchandise costs. QoQ, revenue improved by 8% due to increase subscription (higher package take-up and sales of FIFA World Cup passes) and advertising revenue (higher spending during Hari Raya period but partially offset by lower advertisement activity during the tax holiday period). Group EBITDA, however, dipped by 37% with margin declining to 20.4% (vs. 35.2% in 1Q19) as a result of higher content costs from FIFA World Cup.

Deeper customer engagement. ASTRO recorded a total of 5.6m (+0.3% QoQ or 76% household penetration rate) customer base as of end-2Q19, mainly supported by NJOI. The higher NJOI take-up rate suggested that subscribers continued to downplay their TV subscription plan, causing the group’s TV subscription revenue to record negative sequential growth for six consecutive quarters. Moving forward, the group is set to continue engaging customer across platforms while enriching its vernacular and sport contents (where ASTRO has secured exclusive Premier League rights for the next three seasons until 2021/22) as well as to provide seamless viewing experience across all screens. The group is also set to introduce 4K Ultra HD offerings. All in, management is keeping its FY19 Pay-TV subscription ARPU unchanged at RM101 (underpinned by higher take-up of its vernacular and live sports packages as well as better monetisation on its IP creative contents) but set to incur a higher content cost (at c.37% of TV revenue vs. 33% in FY18) as a result of the several sport events.

Bumpy road ahead. The introductions of higher broadband speeds coupled with more affordable subscription price packages are expected to enhance video streaming experience on over-the-top or illegal streaming sites. This could post a great challenge to the traditional subscription-based Pay-TV operators given that the younger generation, who grew up with video on demand and broadband, tend to consume content in their pocket devices rather than to the big screen. On top of that, more broadcasting licences are likely to be distributed as the new government is planning to liberalise and promote competition in the Pay- TV segment in order to create a healthier market space.

Downgrade to MARKET PERFORM with lower DCF-driven TP at RM1.60 (vs. RM2.00 previously). Post results review, we have trimmed our FY19-20E PATAMI by 26-13%, respectively, after incorporating the weak 2Q19 results and revised our revenue and content costs assumptions. We also raise our WACC assumption to 11.7% (vs. 10.8% previously) to account for greater and intensified competition post the introduction of more affordable and speedy broadband packages.

Source: Kenanga Research - 27 Sep 2018