9MFY20 earnings of RM529m (+31%) and interim dividend declared are within expectations. The group has been proactive with new partnerships to present fresh offerings to consumers. Meanwhile, a close eye on cost management should keep profits in check amidst top-line challenges. Maintain OUTPERFORM and DCF-driven TP of RM2.00 (based on WACC: 10.8%, TG: 1.0%).

9MFY20 as expected. 9MFY20 core PATAMI of RM529m came in within our/consensus expectations, making up 75%/78% of respective full-year estimates. The interim dividend of 2.0 sen (YTD: 6.0 sen) declared is deemed to be broadly within our 11.0 sen full-year payout, counting on a lumpy 4Q dividend payment in conjunction with the solid earnings improvement.

YoY, 9MFY20 revenue softened by 10% to RM3.69b following weakness across all business segments, particularly its key television subscription segment (-11%). Average ARPU remained stable at RM99.90/mth, which could indicate that customers are moving from paid subscriptions in favour of freemium offerings. On the flipside, thanks to cost optimisation efforts and lower content cost seen in 9MFY20 (due to the previous year being inflated by the FIFA World Cup), EBITDA came in at RM1.34b (+9%) with margin of RM36.3% (+6.6ppt). In addition, with lower effective tax of 24.0% (-4.7ppt), core PATAMI rose by 31%.

QoQ, 3QFY20 top-line saw a flattish decline (-2%) on weaker television revenue from slightly lower ARPUs and possibly fewer paid subscriptions but was cushioned by better activity from radio and homeshopping segments. Ultimately, core PATAMI came in 4% stronger, as lower operating expenses were offset by higher interest payments during the quarter but was mitigated by lower tax payments.

Pulling the stops. ASTRO has been aggressive in ensuring its brand image remains relevant in the eyes of the consumers. In addition to bundled offerings with telcos for value-for-money packages, the group has brought in the Chinese content heavyweight - iQIYI to deliver its exclusive content as its first app partner outside of China. More recently, the group launched its new Ultra Box to provide an enhanced viewing experience to its subscribers. Putting customer acquisition activities aside, the group continues to keep cost management in check with constant reviews on content costs. Pushing for more locally produced content could also reduce the group’s dependency and exposure to international products which could be more costly.

Post-results, we tweak our FY20E earnings by +0.4% on minor housekeeping adjustments, but trim our FY21E earnings by 3.1% in anticipation of higher marketing costs to fuel the efforts above.

Maintain OUTPERFORM and DCF-driven TP of RM2.00. Our target price (based on WACC: 10.8%, TG: 1.0%) implies a 14.5x FY21E PER, which is 0.5SD below the group’s 3-year mean. We reckon the below average valuations could be an indication of investors’ hesitation with the stock in the face of the heavily shifting landscape of the paid TV business amidst internet piracy and a wide range of alternative international brands, coupled by the diminishing local adex scene. Even taking this into account, we believe the group still holds a strong value proposition with its proactive efforts to evolve with consumer preferences. Cost management efforts also look to be fruitful on top of attractive dividend yields of c.8%.

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

Source: Kenanga Research - 5 Dec 2019