1QFY23 normalised PATAMI came in at RM119m, below both our and consensus expectations. Lower-than-expected ARPU and subscriber growth combined with increased content costs led to EBITDA margins tightening. We have adjusted our earnings estimates downwards for FY22/FY23 by 27%/8% as well as the dividend to 6.5 sen. Thus, we downgrade our call to MARKET PERFORM with a lower TP of RM1.00 (from RM1.29) based on DCF (WACC 7.9%, TG: 1%).

1QFY23 results came below expectations. ASTRO registered a normalised PATAMI of RM119m which came in below both our and consensus expectations at 20% and 22% of the full-year earnings estimates, respectively. The group declared a dividend of 1.25 sen which came below expectations.

YoY, 1QFY23 revenue dropped 9% to RM 962m due to a 6% decline in subscription revenue and a 53% drop in home-shopping revenue. Their radio segment grew slight by 14% but the segment contributed less than 5% of total revenue. Home-shopping revenue fell mainly due to the easing of COVID-19 restrictions enabling in-person shopping again as well as decreased consumer spending in general, attributable to a more cautious sentiment due to rising inflation. Subscription revenue fell 6% as TV household penetration fell from 75% to 71%. ARPU rose marginally by 0.2% as the remaining consumer base saw a slight increase in spending on premium packages. EBITDA margins tightened by 2.5ppt due to costs incurred from their broadband and increased marketing and research expenses. Overall, core PATAMI declined 19% to RM119m.

QoQ, EBITDA margin increased 3ppt as cost of content saw a 3% increase in EBITDA to RM315m. However, core PATAMI fell 9% as revenue decreased across all segments due to lower merchandise sales, subscription revenue and advertising revenue. Radio PBT fell 40% as advertising spending decreased compared to the holiday season the previous quarter.

High content costs. FY23 is expected to be a difficult year for ASTRO as tightening margins are expected moving forward. The number of high-profile sporting events such as the World Cup and the Commonwealth Games are expected to impose heavy licensing costs on ASTRO in FY23. Combined with decreased footfalls in F&B outlets which commonly license these events from ASTRO, the Group may struggle to maintain their margins if they are unable to sufficiently pass on the cost to subscribers. They also face competition from illegal channels as pirate TV boxes and internet piracy impact their subscriber numbers. Overall, per the Group’s guidance, we have updated our content cost estimates to 35% of total revenue.

Post results, we decrease our FY23E and FY24E earnings by 27% and 8%, respectively. While we are still positive on growth via their on demand and streaming services, the expected uptick in costs will extract a heavy toll on FY22E earnings. We have adjusted our overall subscriber growth for FY22 downward slightly from 20% to 16%, reflected in both FY22 and FY23 estimates.

Downgrade to MARKET PERFORM with a lower TP of RM1.00 (previously RM1.29). Based on our DCF assumptions of a WACC: 7.9% (which has also moved higher on a rising risk-free rate) and a TG of 1%, we value ASTRO at RM1.05. We remain cautious on ASTRO moving forward. If the 1QFY23 numbers are an indication of year-long performance, FY23 could be a difficult year for the group.

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

Source: Kenanga Research - 22 Jun 2022