1H20 earnings came in within our, but above consensus, expectation, at 50% and 57%, respectively. Top-line diminished marginally but better cost optimisation and lower content cost led to better profitability. Going forward, ASTRO will continue to focus on defending its earnings through better cost management and strategic tie-ups. Maintain OUTPERFORM and TP of RM2.00 (based on WACC: 10.8%, TG: 1.0%).

Within expectations. 1H20 Core PATAMI of RM352.6m came in within our but slightly above consensus expectation at 50% and 57%, respectively. The miss from the consensus was likely due to their overly pessimistic cost assumptions. Note that a post-tax unrealised forex loss of RM7m was excluded from our Core PATAMI calculation. The interim dividend of 2.0 sen (YTD: 4.0 sen) is deemed to be broadly within our estimate.

YoY, 1H20 revenue declined to RM2.5b (-9%) due to: (i) lower subscription revenue (-9%), (ii) weaker radio revenue (-12%), and (iii) almost flat merchandising revenue (-2%) which was partially mitigated by the increase in advertising revenue (+5%). Despite the decline in revenue, Core PATAMI came in higher at RM352.6m (+57%), due to the absence of FIFA which inflated 1H19 content cost to 39.6% (vs. 1H20 at 33.1%). More favourable marketing and distribution costs amid the on-going cost containment effort also contributed. QoQ, revenue inched up to RM1.2b (+0.2%) as Radio (+10%) and Home Shopping (+8%) growth cushioned the slight decline in TV subscriptions (-1%). However, due to higher content cost in 2Q20, EBITDA margin diminished to 35.3% (-1.3ppt) which translated to a lower core PATAMI of RM168.4m (-9%).

Notable trend. ARPU in 1H20 increased to RM100.0 (+0.1% YoY) owing to rising consumption across platforms, while TV customers based grew perpetually to 5.7m (+1% YoY) as ASTRO TV viewership continued to gain market share at 75%. Note that, ARPU in 1H20 was closely in-line to the RM100 level mark (above its 1H19 average), which we deem a positive and expect it to hold at current levels, as the group is able to find an optimal price point for its packages.

Reaching out to a bigger audience. The media industry appears to be undergoing structural changes, where competition arises not just from piracy but also pressures from international OTT platforms (Apple TV, Netflix and Disney). To combat this, management maintains focus towards: (i) vernacular content to cater to local flavors, (ii) strategic tieups with local telco players to enable cross-selling opportunities, and (iii) enhancing seamless experience that customers could enjoy with its offerings (exclusive rewards and privileges). Apart from these, the group continues its effort on cost optimization initiatives, which include digitalization of processes and content cost renegotiation. All in, we concur with management’s focus to strengthen its core business and also their on-going cost optimization efforts.

Post results, we made no changes to our earnings estimates.

Maintain OUTPERFORM and DCF-driven TP of RM2.00. Our DCFdriven TP of RM2.00 (WACC: 10.8%, Terminal Growth Rate: 1.0%) implies FY20 PER of 14.7x (-1.5SD level to its 5-year mean). Among the media companies under our coverage, we think that ASTRO is currently trading at a cheap valuation of Fwd. PER (FY20E) of 10x vs. our media coverage average of 14x. Moreover, we continue to like ASTRO for its attractive dividend yield (8%) while earnings remain relatively resilient as effective cost management buffers top-line weaknesses.

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 - 13 Sept 2019