INVESTMENT HIGHLIGHTS

• 3QFY18 normalised earnings largely impacted by rise in operating cost

• Nonetheless, 9MFY18 financial performance is still within our expectation

• Sales improved for the home shopping segment due to higher number of products sold

• Maintain BUY with an unchanged target price of RM3.64

Higher cost incurred in 3QFY18. Astro Malaysia Holdings Bhd (Astro) reported 3QFY18 earnings of RM146.6m. After adjusting for exceptional item, the normalised earnings came in -16.4%yoy lower at RM135.3m. Note that the exceptional item pertained to unrealised forex gain due to MTM revaluation of M3B transponder lease liability amounting to RM11.3m. The lower 3QFY18 normalised earnings was mainly impacted by higher license, copyright and loyalty fees, higher selling and distribution expenses and higher telecommunication cost, as a percentage of revenue. Fortunately, the decrease was offset with impairment in associate of RM15.1m and lower net finance costs.

Cumulative earnings within estimates. Cumulatively, 9MFY18 normalised earnings improved by +2.9%yoy to RM495.8m. The improvement in 9MFY18 normalised earnings was supported by higher operational efficiency contributed by drop in content costs and lower cost to serve. All in, the group’s 9MFY18 financial performance came in within our but below consensus expectations, accounting for 70.6% and 65.1% of FY18 full year earnings estimates respectively.

Television. The 9MFY18 segment revenue fell slightly by -2.0%yoy to RM3,696.8m mainly due to reduction in subscription and advertising revenue. The decrease was partially offset by higher production revenue. Nonetheless, EBITDA improved by +5.5%yoy mainly due to the decrease in content cost. To recall, there is a one-off gain resulting from content cost renegotiation in 2QFY18 which we estimated to be approximately RM70m.

Radio. Radio revenue for 9MFY18 remained resilient at RM239.5m. However, the higher operating costs incurred has lowered the EBITDA by -8.9%yoy.

Home-shopping. The home-shopping segment’s revenue expanded by +2.2%yoy to RM205.0m, premised on higher number of products sold. This was supported by increase in registered customer to 1.2m (+39.0%yoy). As a result, EBITDA was enhanced by +10.4%yoy.

Dividend. The group announced 3QFY18 second interim dividend of 3sen per share. Cumulatively, 9MFY18 dividend amounted to 9sen per share, in-tandem with 9MFY17’s quantum. This made up 69.2% of our FY18 full year dividend estimates of 13sen per share.

Target price. We are maintaining our target price to RM3.64 per share. This is premised on pegging our target PER of 26x against the FY19 EPS of 14.0sen per share. Our target PER is the three year historical average PER.

Maintain BUY. Despite various headwinds affecting the media industry, the group continues to outperform by successfully expanding its customer base through dual-model, i.e. premium and freemium market approach. Based on the business model, bulk of the income stream is derived from subscription revenue as opposed to advertising revenue. In addition, the group also expanded its revenue stream by tapping into the consumer market through its home shopping business venture and its digital initiatives. Moreover, its continuous cost management strategy has also kept the operating cost at bay. As a result, it has strong cash generation capability which enables the adoption of a progressive dividend policy. At present, the stock offers an attractive dividend yield of more than 4% which further elevates Astro’s attractiveness. All factors considered, we maintain our BUY recommendation on the stock.

Source: MIDF Research - 7 Dec 2017