ASTRO posted a decent report card for 3Q19, lifted by a rebound in adex and higher contribution from its home- shopping segment. Moving forward, ASTRO is set to deepen its value proposition for customers across multiple platforms. Post review, we shaved FY19E core PATAMI slightly but keep FY20E PATAMI unchanged. Maintain TP at RM1.60 but raised rating to OUTPERFORM in view of its relatively resilient earnings and attractive dividend yield.

Largely in-line. 9M19 core PATAMI of RM404m (-29% YoY) came in largely within expectations at 70% each of our/consensus full-year estimates. The weak YoY performance was mainly due to lower EBITDA coupled with higher net finance costs as a result of higher interest expenses for borrowings and finance lease liabilities. As expected, the group declared a third interim dividend of 2.5 sen (3Q18: 3.0 sen; 9M19: 7.50 sen vs. 9M18: 9.0 sen) with ex-date set on 20th of December.

YoY, 9M19 revenue weakened by 1%, due to the lower subscription (more lower-priced packages 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 RM275m due to the higher number of products sold (mainly driven by tactical campaigns) with narrowed LBT of RM6m vs. –RM12m a year ago. Despite lower turnover, group’s EBITDA dipped by 14% to RM1.2b with margin lower by 480ppt to 29.7%, no thanks to higher content costs from FIFA World Cup and increase in merchandise costs. QoQ, revenue declined by 2% due mainly to a weaker subscription revenue (as a result of slower package take-up post the FIFA World Cup) but partially offset by recovery of advertising revenue (+11% to RM179m, underpinned by resumption of ads spend post tax holiday period) and higher merchandise sales. Note that, its home shopping segment recorded higher quarterly revenue of RM98m in 3Q18 with maiden PBT of RM1m. Group EBITDA, meanwhile, surged by 64% with margin enhanced to 34.2% (vs. 20.4% in 2Q19) as a result of lower content costs post FIFA World Cup.

Enhancing customer value proposition. ASTRO recorded a total of 5.7m (+0.5% QoQ or 76.5% household penetration rate) customer base as of end-3Q19, mainly supported by NJOI. The group will continue engaging customer across platforms while enriching its vernacular (which accounted for 64% of its TV viewership) and live sport contents as well as to provide seamless viewing experience across all screens. Besides expanding its ecosystem around the core business, ASTRO also plans to deepen its value proposition to customers by providing exclusive membership privileges and lifestyle experiences.

Building a stronger ASTRO. In light of the challenges ahead, ASTRO plans to implement a strategic review of its business as well as organisation structure, including deeper cost rationalization and workforce optimisation, which are set to incur one-off costs (with quantum yet to be shared at this juncture) in the coming month once finalised. 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) with an aim to sustain its churn rate at 10-12% range and achieve core EBITDA margin of 30%.

Upgrade to OUTPERFORM with an unchanged DCF-driven TP at RM1.60 (WACC: 11.8%, TG: 1%). Post results review, we have trimmed our FY19E PATAMI by 2.3% post fine-tuning and keeping our FY20E numbers unchanged. Maintain TP but raise the stock rating to OP in view of its relatively resilient earnings (underpinned by its growing digital adex coupled with rising home shopping segment contribution) and attractive dividend yield of more than 7%. Risks to our call include: (i) lower-than-expected subscription and adex revenue, and (ii) higher- than-expected content and OPEX.

Source: Kenanga Research - 06 Dec 2018