INVESTMENT HIGHLIGHTS

• 3QFY19 normalised earnings grew +32.1%yoy mainly supported by the rise in profit margin to 12.9%

• Nonetheless, 9MFY19 normalised earnings decline by - 28.6%, in-line with our expectation

• 9MFY18 cumulative dividend amounted to 7.5sen per share, on track to meet our FY19 dividend estimates

• Maintain NEUTRAL with a revised target price of RM1.32

Surge in content cost reduces profitability. Astro Malaysia Holdings Bhd’s 3QFY19 normalised earnings amounted to RM178.7m, an increase of +32.1%yoy. This was mainly attributable to lower content costs, license, copyright and loyalty fees and impairment of receivables. Consequently, the normalised profit margin to 12.9% from 9.7% in 3QFY18. Note that 3QFY19 revenue remains flat at approximately RM1.4b.

In-line with expectation. Despite recording a strong 3QFY19, cumulatively 9MFY19 normalised earnings decreased -28.6%yoy to RM RM404.0m. This was mainly impacted by: i) higher content costs from the broadcasting of FIFA World Cup, ii) increase in merchandise costs, and iii) increase in interest expenses for borrowings and finance lease liabilities. All in, Astro’s 9MFY19 financial performance came in within our expectation, accounting for 80.4% of full year FY19 earnings estimate.

Earnings impact. We are fine-tuning FY19 earnings estimate slightly higher by +1.9% as we cut our content cost assumption to better reflects the results thus far. However, we made no change to our FY20 earnings estimate at this juncture.

Dividend. The group announced 3QFY19 dividend of 2.5sen per share. This leads to 9MFY19 dividend of 7.5sen per share which is in-line with our full FY19 dividend estimate of 10sen per share.

Target price. We are deriving a new target price of RM1.32 (previously RM1.55). This is premised on revised forward PER of 12.7x which is one standard deviation below its one-year historical average pegged against FY20 EPS of 10.4sen per share. Note that previously we were attaching a forward PER of 14.9x which is one standard deviation below its three-year historical average. Our change in target PER reflects the evolving competitive landscape of the Pay-TV industry whereby the availability of faster broadband speeds at a more affordable pricing could potentially entice the younger generation to switch to the service of over-the-top (OTT), streaming sites and/or android TV box.

Maintain NEUTRAL. Historically, Astro has benefitted from the broadcasting of major sporting events. However, the escalating content cost has served as a double-edged sword for the group as seen in its latest quarterly earnings performance. The radio segment also performed poorly as their clients’ advertising spending reduces. Fortunately, the home shopping segment continues to gain positive traction as its loss-making position continues to improve. Collectively, we expect these factors will put Astro in a difficult position to grow its profit margin and, thus, profitability. In the foreseeable term, we expect Astro’s profit margin will come in below 10%. Meanwhile, we view that the healthy free cash flow would enable the group to support its dividend commitment. At this juncture, we anticipate that the attractive dividend yield of more than seven percent would help to partially buffer for the expected weakness in share price performance. All factors considered, despite the slightly higher than 10% expected total return, we maintain our NEUTRAL recommendation on Astro.

Source: MIDF Research - 6 Dec 2018