1Q20 earnings came slightly above our/consensus’s expectations at 27%/30% due to better-than-expected operating margin. Results saw growth in bottom line mainly from better cost optimisation despite lower revenue. Moving forward, ASTRO focus’s will be on its TV business through offering better value proposition for its customers. Post results, we increase our FY20-21E earnings slightly by 3.2%-0.8%. Maintain OUTPERFORM (due to its high dividend yield and attractive valuation) with TP of RM2.00.

Slightly above expectations. 1Q20 Core PATAMI of RM184.2m came slight above expectation of our/consensus full year estimates at 27%/30% mainly due to better-than-expected operating margins. Note that our Core PATAMI calculation excludes the post-tax unrealised forex loss of RM8m. 1Q20 dividend of 2.0 sen was declared, coming in below our full-year estimate of 11.0 sen. However, we believe that this is broadly in-line as subsequent quarter’s dividend should be higher to meet its minimum dividend policy of 75%.

Results Highlight. YoY, despite 1Q20 revenue declining by 6% mainly due to (i) lower TV subscription revenue (-7.4%), and (ii) lower radex revenue (-11.9%), 1Q20 Core PATAMI was higher by 3.1%, aided by improvement in EBIT margin (+0.8 ppts) from lower marketing and distribution cost, and lower net interest expense (-5.8%). QoQ, revenue was lower by 9.8% contributed by the decrease in TV subscription revenue (-4.1%), advertising revenue (-26.3%) and merchandise sales (-15.8%). However, core PATAMI was higher by 16.3% coming from lower staff cost as a result of the VSS (voluntary separation scheme) that happened in 4Q19 and lower content costs, of which saw EBIT margin expanding (+6.1 ppts).

Redefining customer’s value proposition. The on-going structural changes in the content and media industry together with the piracy threat will continue to be challenging for ASTRO. For FY20, ASTRO’s focus will be on strengthening its core TV business by continuing its offering of signature vernacular and premium contents to its customers. ASTRO is also working on more partnerships to provide more content, with the latest being the exclusive partnerships with OTT players such as iQIYI (China’s No.1 video streaming service platform) and HBO GO (with over 3,000 hours of HBO content). Apart from those, the group is also continuing its effort on cost optimization. Some of these cost optimization initiatives include digitalization of processes and content cost renegotiation. All in, we concur with management’s focus to strengthen its core business and also the on-going cost optimization efforts.

Upgrade earnings FY20-21E. Post results, we increase our FY20-21E earnings slightly by 3.2-0.8% after factoring in the better-than-expected margins in 1Q20.

Maintain OP with DCF-driven TP of RM2.00. Our DCF-driven TP of RM2.00 (WACC: 10.8%, Terminal Growth Rate: 1%) implies FY20 PER of 14.7x (-1.5SD level to its 5-years mean). Among the media companies under our coverage, we think that ASTRO is currently trading at a cheap valuation of Fwd. FY20E PER of 11x vs. our media coverage average of 15x. Moreover, we continue to like ASTRO for its attractive dividend yield (more than 7%) while earnings remain relatively resilient.

Risks to our call include: (i) lower-than-expected subscription and adex revenue, and (ii) higher-than-expected content cost and operating expenses.

Source: Kenanga Research - 26 Jun 2019