INVESTMENT HIGHLIGHTS

• 1QFY19 normalised earnings of RM184.0m (+2.8%yoy) came in within expectation

• Quarterly profit margin improved further to 14.9%

• Analogue switch off (ASO) to be in favour given its attractive contents proposition

• 1QFY20’s interim dividend amounted to 2.0sen per share

• Earnings forecast revised upwards

• Upgrade to BUY with a revised target price of RM1.74

Within expectation. Astro Malaysia Holdings Bhd’s (Astro) 1QFY20 normalised earnings increased marginally by +2.8%yoy to RM184.0m. This came in within both our and consensus expectations, accounting for 30.0% of full year FY20 earnings estimates respectively. The normalised earnings excludes post-tax impact of unrealised forex loss of RM8.0m in 1QFY20. The higher earnings was primarily due to the lower content costs and other expenses which resulted from its cost rationalisation plan. Note that the content costs and other expenses in 1QFY20 declined by -2.5%yoy and -8.4%yoy respectively.

Resilient quarterly revenue. Astro’s 1QFY20 group revenue decreased by -5.8%yoy to RM1,234.4m. This was mainly attributable to the fall in subscription revenue by -7.0%yoy to RM1,005m, particularly from the pay-TV segment. We view that this was caused by the heightened competition environment arising from increased piracy contents and other competitive OTT players.

Upholding its adex performance. Astro’s 1QFY20 total adex declined by -4.0%yoy to RM145.0m, mainly impacted by the fall of radex of -11.0%yoy. Comparatively, the total Malaysia gross adex in 1QFY20 fell by -9.0%yoy while radex significantly dropped by - 20.0%yoy.

Earnings impact. We revised upwards our earnings forecast for FY20 and FY21 marginally by +1.9%yoy and +0.3%yoy to RM626.7m and RM633.2m respectively given the potential cost savings and earnings accretion from the ASO which could benefit Astro.

Dividend. The group announced 1QFY20 first interim dividend of 2.0sen per share. Note that this was half a cent lower compared to 1QFY19 interim dividend of 2.5sen per share. Nonetheless, we maintain our dividend assumption of 10.0sen per share given our upward revisions of earnings.

Target price. We roll forward our valuation base year to FY21 and deriving a new target price of RM1.74 per share (previously RM1.50 per share). This is premised on forward PER of 14.0x which is the 2-year historical average pegging against FY21 EPS of 12.4sen per share.

Maintain NEUTRAL. Despite the declining pay-TV subscription revenue, the pay-TV ARPU managed to show improvement and we view that it was through the higher consumption from its On Demand VOD and OTT platforms. We also view that the company’s ongoing cost rationalisation initiatives were able to support earnings momentum going forward. We believe the lower costs were mainly due to focus on local contents and manpower rationalisation in 4QFY19. In addition, Astro continues to strengthen its pay-TV and streaming platforms with more attractive and premium contents through recent exclusive tie-ups with HBO Go and iQIYI. We view that this will serve as a key differentiating factor for consumers to opt for Astro’s NJOI and streaming platforms over MYTV during the analogue switch-off effective in 3QCY19. Coupled with its broadband content bundling with Maxis, we opine these would be earnings accretive developments for Astro going forward. All factors considered, we upgrade our call recommendation on Astro to a BUY (previously NEUTRAL).

Source: MIDF Research - 26 Jun 2019