ASTRO’s 9MFY23 results disappointed due to rising content costs while its subscriber base continued to contract. Looking forward, the MYR’s weakness against the USD will continue to cloud its FY24F outlook due to its USD-denominated costs. We cut our FY23- 24F earnings by 20-14%, reduce our DCF-based TP by 17% to RM0.75 (WACC 7.9%; TG: 1%) from RM0.90 and maintain our MARKET PERFORM call.

Below expectations. ASTRO’s 9MFY23 core net profit (excluding RM91m net forex loss on satellite lease liabilities) missed expectations, accounting for only 67% and 68 % of our full-year forecast and the full year consensus estimates, respectively. The variance against our forecast came largely from a steeper-than-expected contraction of the home-shopping segment and our under-estimation of content costs in 3QFY23. The declared dividend of 0.75 sen brings the total for the year to 3.0 sen, below our estimate of 6.5 sen.

Results’ highlights. 9MFY23 revenue fell 10.6% due to falling subscription revenue and home-shopping sales. Its TV earnings fell 13.6% YoY (excluding unrealised forex losses) due to a 2.3% contraction in its subscriber base as well as higher content costs. The radio segment saw much better days as earnings grew 53.9% YoY, but improvements were largely offset by the contraction in the home-shopping segment. The segment struggled to stay relevant with the lifting of pandemic restrictions. On a 54.9% YoY plunge in revenue, it slipped into the red for 9MFY23.

Overall, core PATAMI fell 14% YoY, broadly in line with the decrease in revenue. Earnings contracted across the board (other than radio) and it struggled with cost escalation and viewer retention.

QoQ. Revenue remained relatively flat as better adex across the broadcasting business, was offset by the contraction in the home shopping segment. However, its core PATAMI fell 29.8% due to higher content costs (the Commonwealth Games took place during 3QFY23) as well as higher marketing and distribution costs.

The key takeaways from the briefing are as follows:

1. Its 4QFY23 does not look promising given the World Cup that will drive up content costs significantly. It guided for net content costs for the year to be around 38% of TV revenue. Recall, during the Tokyo Olympics, its content costs increased to 39% of TV revenue over two quarters. While the sales of World Cup passes across their NJOI and Sooka platforms may help, we still expect margin compression in 4QFY23.

2. The outlook for subscription numbers and ARPU seems mixed. The group continues to struggle with declining subscription numbers, but is seeing an upward trend in ARPU (calculated on a 12-month trailing basis) recently as they push their higher-priced bundle packages. The group said that the retention rate on their Internet bundles is higher than stand-alone subscriptions.

3. Meanwhile, the MYR’s weakness will continue to weigh on the group’s FY24 prospects. It guided for net content costs at 33%-34% of revenue in FY24. Recall, its content costs typically hover around the 30%-31% range in the absence of major events.

4. The RM91m net forex loss on satellite lease liabilities (or RM128.2m at the pre-tax level), could change from unrealised (no cashflow impact) to realised (with cashflow impact) if the MYR’s weakness against the USD persists.

Post results, we cut our FY23-24F earnings by 20-14%, largely to reflect the increased content costs as guided, as well as higher operational costs stemming from the MYR’s weakness against the USD. We also reduce our FY23-24F dividends to 5.2- 6.3 sen, in line with the group’s guidance for a 75% payout ratio.

We continue to like ASTRO for its: (i) position as the largest player in the subscription TV space, (ii) unique service as an over-the-top (OTT) streaming service aggregator, and (iii) growth potential as an internet service provider (ISP). However, we remain wary as the group continue to struggle with subscriber retention and declining ARPU. We cut our TP by 17% to RM0.75 (WACC: 7.9%; TG: 1%) from RM0.90 previously. There is no adjustment to our TP based on ESG given a 3-star as appraised by us (see Page 4).

Risks to our call include: (i) competition from legal and illegal international streaming service providers, (ii) weak MYR resulting in high cost of imported contents, and (iii) regulatory risks.

Source: Kenanga Research - 16 Dec 2022