KEY INVESTMENT HIGHLIGHTS

• Higher 3QFY20 normalised earnings of RM171.2m (+11.3%yoy) due to continuous cost-cutting measures

• 9MFY20 normalised earnings improved by +13.3%yoy to RM523.5m, in line with both our and consensus expectations

• Continuous cost optimisation plan led to -16.0%yoy reduction in total cost in 9MFY20

• 9MFY20’s dividend amounted to 6.0sen per share

• Maintain BUY with an unchanged target price of RM1.84

Within expectation. Astro Malaysia Holdings Bhd’s (Astro) 3QFY20 normalised earnings increased by +11.3%yoy to RM171.2m, mainly due to continuous cost-cutting measures. Meanwhile, Astro’s 9MFY20 normalised earnings increased by +13.3%yoy to RM523.5m. This is in line with both our and consensus expectations, accounting for 77.5% and 77.9% of full year FY20 earnings estimates respectively. The better 9MFY20 earnings were primarily attributable to the notable reduction in total cost in line with its focus on operational efficiency.

Uplift in profit margin. 9MFY20 profit margin improved to 14.1% (+3.0ppts). This was underpinned by the resilient ARPU and overall reduction in cost. This was in spite of the decline in revenue to RM3.7b (- 10.3%yoy). Note that the ARPU remains healthy at about RM99.9 as of 3QFY20.

Continual focus on operational efficiency. Astro’s 9MFY20 total cost dropped by -16.0%yoy to RM2,850m, resulting from its improving operational efficiency in major cost areas such as content and other expenses at the TV segment. Lower content cost was also partially due to high base effect seen in 9MFY19 in view of the FIFA world Cup 2018. All in, 9MFY20 content cost contracted by -24.7%yoy to RM718m. Meanwhile, the -11.4%yoy reduction in other expenses was mainly stem from the lower marketing and distribution costs which fell by -26.1%yoy to RM272.3m. Note that the finance cost decreased as well, by -28.7%yoy to -RM199.7m.

Leading creative content producer. The group has been continually churning out successful local vernacular contents that contribute to the earnings momentum at the pay-tv segment. To date, Astro has managed to produce and distribute four of the top 5 highest grossing films in 2019. For instance, the “BoBoiBoy The Movie 2” and “Pusaka” have raked in approximately RM30.0m and RM13.5m in gross local box office. Its movie contents were also wellreceived by other countries in the Southeast Asia region. We expect the demand for locally-produced quality contents would help to improve Astro’s earnings quality as well as adding new popular local contents to its library. This is in line with Astro’s strategy to increase the share of local contents and thus gradually reducing its content costs going forward.

Earnings forecasts. We are maintaining our earnings forecast at this juncture.

Dividend. The group announced 3QFY20 second interim dividend of 2.0sen per share, leading to a total dividend declared of 6.0sen per share in 9MFY20. Note that this is one and a half cent lower compared to 9MFY19 interim dividend of 7.5sen per share. We are also revising our dividend assumption to 9.0sen per share (previously 10.0sen) as we view that the group will retains more cash for earnings-accretive projects.

Target price. We are maintaining our target price of RM1.84. This is premised on forward PER of 14.0x pegging against FY21 EPS of 13.2sen per share.

Maintain BUY. We remain sanguine on the outlook of Astro as it continues to show meaningful progress on its cost optimisation plan while pursuing profitability through its multitude of platforms. We believe that 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 postulate 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 4K UHD box and broadband content bundling with Maxis are positive developments as it could cement its position as the leader in the paytv segment. The increase in the number of connected set-top box as of 9MFY19 also indicates that consumers are possibly opting for Astro’s attractive contents (e.g. HBO Go and iQIYI) upon the full completion of analogue switch-off in October 2019. We expect this would increase monetization opportunities for Astro through its platforms. Coupled with the appealing dividend yield of 6.6% stock, we are maintaining our BUY recommendation on Astro.

Source: MIDF Research - 5 Dec 2019