ASTRO posted a decent report card for FY19. Moving forward, ASTRO is set to deepen its value proposition for customers across multiple platforms with revenue diversification, deeper cost optimisation as well as anti- piracy push to be its key focus in FY20. We raised our FY20E core PATAMI by 3%. Maintain OUTPERFORM (in view of its relatively resilient earnings and attractive dividend yield) with higher DCF-derived TP of RM2.00.

Within expectations. FY19 core PATAMI of RM563m (-17% YoY) came in within expectations at 100%/98% of our/consensus full-year estimates. Note that, the core PATAMI was derived after adding the unrealised forex loss of RM41m and one-off separate scheme cost of RM58m. The lower YoY performance was mainly due to lower EBITDA (as a result of higher content cost led by the World Cup event) coupled with an increase in net finance costs as a result of unfavourable forex movement arising from unhedged finance lease liabilities. The group declared a lower fourth interim dividend of 1.5 sen (vs. 2.5 sen/3.0 sen of house/consensus estimate), bringing its full-year DPS to 9.0 sen (FY18: 12.5 sen).

YoY, FY19 revenue weakened by 1%, due to 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 29% to RM374m due to the higher number of products sold (mainly driven by tactical campaigns) with narrowed LBT of RM6m vs. –RM15m a year ago. Group EBITDA dipped by 12% to RM1.6b with margin lower by 370ppt to 29.2%, no thanks to higher content costs from FIFA World Cup, higher staff-related costs (as a result of VSS scheme) and increase in merchandise costs. QoQ, revenue declined by 1% due mainly to a weaker subscription revenue but partially offset by the recovery of advertising revenue (+9% to RM196m, underpinned by year-end festive season). Group EBITDA, however, dropped 21% with margin dipping to 27.4% (vs. 34.2% in 3Q19) mainly due to the one-off pre-tax separation scheme cost of RM83m.

Notable trend. ASTRO recorded a total of 5.7m (+4% YoY/+0.9% QoQ or 77% household penetration rate) customer base as of end-4Q19, mainly supported by NJOI. Despite more lower-priced packages take- up over the past few quarters, its blended APRU has been relatively stable at c.RM100 over the past five quarters, suggesting that the group may have found an optimal price point for its packages.

Expanding its ecosystem. ASTRO believes FY20 will continue to be challenging amid structural changes in the global content and media industry and aggravated by prevalent piracy. Continued revenue diversification efforts (i.e. broadband bundles and targeted marketing/advertising solutions to drive advertising & commerce revenue), deeper cost optimisation as well as anti-piracy push will be its key focus in FY20. Besides expanding its ecosystem around core business, ASTRO also plans to ride its key differentiator – its content, by deepening its strength in local vernacular and Asian originals through strategic partnerships. The group will continue engaging customer across platforms while enriching its vernacular (which accounted for 75% of its TV viewership) and live sport contents as well as to provide seamless viewing experience across all screens. All in, we concur with management’s strategies and efforts in widening its revenue streams.

Maintain OP with higher DCF-driven TP at RM2.00. Post review, we raised our FY20E PATAMI by 2.5% (after fine-tuning our OPEX assumptions to align with the latest run-rate) and introduce FY21 numbers. Raised TP to RM2.00 (vs. RM1.60 previously). It implied FY20 PER of 15x (-1S.D. below its 5-year mean) after lowering our WACC assumptions by 1% to 10.7% to account for improving prospect followed the increase anti-piracy efforts from the authority. Risks to our call include: (i) lower-than-expected subscription and adex revenue, and (ii) higher-than-expected content cost and OPEX.

Source: Kenanga Research - 27 Mar 2019