Resilient with appealing dividend yield

Upgrade to BUY; RM3.00 TP. Following recent weakness in its share price, Astro now offers 13% potential upside to our unchanged RM3.00 TP and appealing net dividend yield of 5%. We think its resilient 3QFY17 results and a significantly-hedged USD exposure for FY18 should alleviate investors’ worries about potential earnings disappointment due to the weak consumer sentiments in Malaysia. With other dividend-paying stocks such as telcos still facing earnings and cashflow risks, we believe Astro is a good alternative for yield-seeking investors. Upgrade to BUY.

70-75% USD exposure hedged for FY18. Astro guided that it has hedged 70-75% of its USD exposure (mainly for content cost) at the rate of RM4.10-4.15/USD for FY18, not too far from the estimated hedging rate of RM4.00/USD for FY17. This should help to minimise further negative impact from the weaker ringgit, notwithstanding that content costs are likely to decline in FY18 given the absence of major sporting events and further cost management initiatives by Astro. This hedging also gives more clarity and certainty about its key operating expenses going forward.

Valuation

We upgrade our recommendation for Astro to a BUY with unchanged RM3.00 TP, based on DCF valuation – assuming 8.4% WACC and 1.0% terminal growth.

Key Risks to Our View

Inflationary pressure affects disposable income. Inflationary pressure and subsidy rationalisation would reduce consumers’ disposable income, which in turn restricts ARPU growth. Weaker consumer spending may also drive consumers to subscribe to cheaper packages, and/or lead to a higher churn rate.

3QFY17 results – Resilient in a tough operating environment

Within estimates. Excluding unrealised forex losses and oneoff impairment of an associate, Astro recorded normalised net profit of RM171m for 3QFY17, taking 9MFY17 earnings to 74% and 76% of our and consensus full-year forecasts respectively.

3-sen DPS declared. The company declared a third interim DPS of 3.0 sen (9 sen YTD and close to 100% payout), on track to meet full-year dividend expectations of 12-13 sen.

Resilient topline with improving margins. Despite the challenging operating environment, Astro managed to hold up its revenue relatively well in 3QFY17, driven by stable TV subscription revenue and growing adex sales. Operating margins were also better q-o-q, thanks to lower content costs (post Euro 2016 and Olympic Games) and cutback in admin expenses. As a result, normalised earnings improved 11% qo-q, though partly offset by the higher taxation rate in 3QFY17.

Higher churn offset by better ARPU. The churn rate was understandably higher at 12.4% in 3QFY17 (vs. 10-11% in past quarters) as Astro had hiked subscription fee for its sport channel packages. Consequently, net subscribers churn was about 50k in 3QFY17. Fortunately, ARPU was lifted to RM100, which helped to mitigate the subscriber loss. A slight positive is that Astro seems to be able to retain outgoing payTV customers using its free-TV services, Njoi which added 98k subscribers this quarter.

Positive signs for FY18. Content costs are likely to decline in FY18 given the absence of major sporting events amid further cost management initiatives by Astro. In addition, Astro has also hedged 70-75% of its USD exposure at a decent rate of RM4.10-4.15/USD for FY18, thus minimising further negative impact of the weaker ringgit. Coupled with growing adex sales and expectations of EBITDA breakeven for Go-Shop, we believe Astro should achieved improved earnings in FY18 as expected by consensus.

Source: Alliance Research - 8 Dec 2016