KEY INVESTMENT HIGHLIGHTS

• 1HFY20 normalised earnings of RM352.4m (+56.6%yoy), exceeding both our and consensus expectations

• Effective cost rationalisation plan led to -16.8%yoy reduction in total cost in 1HFY20

• 1HFY20’s total dividend amounted to 4.0sen per share

• Earnings forecast revised upwards

• Reiterate BUY with a revised target price of RM1.84

Positive earnings surprise. Astro Malaysia Holdings Bhd’s (Astro) 1HFY20 normalised earnings increased by +56.6%yoy to RM352.4m. This has exceeded both our and consensus expectations, accounting for 56.2% of full year FY20 earnings estimates respectively. The exceptional item relates to post-tax impact of unrealised forex loss of RM7.0m in 1HFY20. The surge in earnings was primarily due to the notable reduction in total cost in line with its focus on operational efficiency.

Commendable cost management. Astro’s 1HFY20 total cost dropped by -16.8%yoy to RM1,923m, resulting from its improving operational efficiency in major cost areas such as content and other expenses at the TV segment. While content cost was expected to normalise from a higher base in 1HFY19 due to FIFA World Cup 2018, we opine the contraction of -24.7%yoy to RM718m was better-than-expected. Meanwhile, the - 11.3%yoy reduction in other expenses was mainly stem from the lower marketing and distribution costs which fell by -27.6%yoy to RM183.6m. Note that the finance cost decreased by -33.1%yoy as well to -RM119.1m.

Improving profit margin. 1HFY20 profit margin improved to 14.3% (+6.0ppts). This was mainly attributable to the increase in ARPU and overall reduction in cost. This was in spite of the decline in revenue to RM2.5b (-9.4%yoy). Note that ARPU has posted an uptick of +0.1%yoy to RM100.0.

Astro’s adex performance outperform industry. Astro’s 1HFY20 total adex declined by -3.0%yoy to RM158.0m, mainly contributed by the fall of radex by -12.0%yoy. To put in perspective, total Malaysia gross adex in the same period fell by -5.0%yoy while radex significantly dropped by -17.0%yoy. This was partially mitigated by the increase in adex from digital and TV which rose +7.0%yoy and +4.0%yoy respectively.

Earnings forecasts. We are making upward adjustment to our FY20, FY21 and FY22 earnings by +7.8%, +8.5% and +5.9% to RM675.8m, RM686.7m and RM696.0m respectively as we are lowering further our cost assumptions.

Dividend. The group announced 2QFY20 second interim dividend of 2.0sen per share, leading to a total dividend declared of 4.0sen per share in 1HFY20. Note that this was a cent lower compared to 1HFY19 interim dividend of 5.0sen per share. Nonetheless, we maintain our dividend assumption of 10.0sen per share given the continued upward trend of earnings.

Target price. We are revising upward our target price to RM1.84 (previously RM1.74) per share. This is premised on forward PER of 14.0x pegging against FY21 EPS of 13.2sen per share.

Maintain BUY. We are optimistic on the outlook of Astro as it continues to show positive progress on its cost management plan while pursuing profitability through its multitude of platforms. We believe the earnings momentum of the group to be primarily driven by its improving cost structure going forward. Meanwhile, the pay-TV ARPU was also managed to stay around RM100 which we posit to be mainly through the higher consumption from its On Demand VOD, OTT platforms (i.e. Astro Go) and NJOI. In addition, we opine that the Astro’ recent launch of its broadband content bundling with Maxis is a positive development as it could reach out to customers in a more efficient manner. The increase in the number of connected set-top box also indicates that consumers are possibly opting for Astro’s attractive and premium contents (e.g. HBO Go and iQIYI) ahead of the analogue-switch off possibly in 4QCY19 or year 2020 which could bode well for Astro in earnings. All factors considered, we are maintaining our BUY recommendation on Astro.

Source: MIDF Research - 13 Sept 2019