Astro Malaysia (Astro)’s 9MFY14 results came in within our  and street estimates. While its revenue continued to grow strongly, high operating and depreciation expenses narrowed its bottomline. Astro continued  to generate strong cash flow and declared a 2 sen dividend for 3QFY14. Maintain BUY on Astro, with an unchanged MYR3.36 FV.

• Within  expectations.  Astro’s  9MFY14  net  profit  of  MYR336.6m  made up  77%/74.3%  of  our/consensus  full-year  forecasts  respectively.  Its revenue grew by 12.7% y-o-y,  mainly attributed to:  i) higher household penetration  rate,  ii)  increased  average  revenue  per  user  (ARPU)  to MYR95.6  (+4%  y-o-y),  and  (iii)  higher  adex  contribution  of  MYR425m (+17%  y-o-y).  9MFY14  EBITDA  climbed  15.5%  y-o-y  to  MYR1.2bn despite higher operating expenses. Nonetheless,  its bottomline was flat y-o-y  on  higher  depreciation  and  amortisation  expenses  arising  from increased cumulative Astro B.yond set-top boxes (STBs) capitalised  and depreciated. Other revenue (radio and adex) also grew positively  in  the period under review.
• Operations overview.  ARPU improved mainly due to  a  higher take-up rate  of  value-added  services.  Gross  adex  continued  to  outperform  the industry,  in  line  with  our sector  view.  Astro’s  cash-generative  business model  raked  in  strong  free  cash  flow  of  MYR710m,  which  almost doubled  its  bottomline.  Astro  continued  to  declare  a  2  sen  dividend payout in 3QFY14, bringing its total dividend payout in 9MFY14 to 6 sen per share.
• Risks.  These  include  high  expenses  and  a  slow  pay-TV  household penetration  rate,  weaker  ARPU  growth,  and  the  emergence  of  new players.
• Maintain  BUY.  We  maintain  our  BUY  recommendation  on  Astro,  with our  MYR3.36 FV derived from DCF with a WACC of 8.45%. While  Astro may not be too attractive  in terms of P/E valuation as  its earnings were pressured  by  high  depreciation  and  amortisation  expenses  which  are non-cash,  these were mainly  attributed to capitalised STBs capex that is crucial for its future earnings growth.

Results Highlight
9MFY14  results  in  line.  Astro’s  9MFY14  net  profit  of  MYR336.6m  came  in  within expectations,  representing  77%  of  our  full-year  forecast  and  74.3%  of  consensus estimate. Its topline continued to grow positively by 12.7% y-o-y, mainly attributed to: i) higher household penetration rate,  ii) increased average revenue per u ser (ARPU) to MYR95.6 (+4% y-o-y), and iii) higher adex contribution of MYR425m  (+17% y-o-y). 9MFY14 EBITDA grew 15.5% y-o-y to MYR1.2bn despite higher operating expenses. Nonetheless,  the  company’s  bottomline  was  flat  y-o-y  as  Astro  incurred  higher depreciation  and  amortisation  expenses  arising  from  increased  cumulative  Astro B.yond set-top boxes (STBs) capitalised and depreciated.

ARPU  growth  on  track.  Management  guided  that  the  ARPU  growth  was  within expectations and  expects  ARPU  to  grow to MYR125  in the next four to five years . The ARPU growth  was mainly driven by a 1.3% y-o-y increase in pay-TV residential subscribers and  a higher take-up rate of its value-added services (VAD),  as  80% of Astro  B.yond  decoder  owners  had  subscribed to its  high definition  (HD)  packages. Moving forward, the company’s  ARPU  is expected  grow stronger  following a hike  in subscription fees effective 24 Nov 2013, in which Astro is charging an extra MYR2 for its  Family Pack  and  an additional  MYR6 for  Sports Pack, while subscription fees for Value Pack  and  Super Pack 3  remained  unchanged.  Given the  increments,  Astro is 
looking at a MYR2.40 net ARPU increase in FY15.  Management shared  that most of its  subscribers are still staying with Astro after the price hike announcement and  it does not foresee a strong surge in churn rate.

Other  revenue  growing  strongly.  Apart  from  its  core  pay-TV  segment,  other revenue  segments  also  grew  strongly,  notably  radio  revenue  climbed  14.9%  y-o-y and  gross  adex  contribution  also  grew  17%  y-o-y.  These  were  in  line  with  Astro’s 
growth plans to expand its topline and defend its market leadership.Escalating  operating expenses.  As highlighted earlier, Astro’s operating expenses are expected to peak in FY14, arising from higher selling, installation, distribution and logistics  costs  driven  by  higher  Astro  B.yond  STB  conversion.  Currently,  80%  of Astro’s subscribers had converted into  B.yond STBs and Astro mentioned that it may scale back its aggressive marketing.

Cash flow remains  strong.  Astro generated MYR710m free cash flow for  9MFY14 as  a  result  of  its  cash-generative  business  strategy.  With  that,  Astro  continued  to declared  a  2  sen  dividend  payout  for  the  quarter  under  review,  bringing  the  YTD dividend payout to 6 sen. If we were to annualise the figures, Astro’s dividend payout would be almost 100%, offering a dividend yield of 2.8%.

Forward  looking.  Astro  will  continue  its  strategy  of  growing  its  topline  and maintaining  its  market  leadership  by  investing  in  capex  to  drive  growth.  In  2014, Astro’s content costs may escalate to the higher end of its content costs,  which  are around  33-36%  of  its  TV  revenue,  as  it  would  need  to  service  the  new  three-year exclusive broadcasting rights of  Barclay’s English Premier League,  in addition to  the 2014  FIFA  World  Cup  and  the  2014  Asian  Games.  Nonetheless,  management  is confident  this  would  be  mitigated  by  stronger  revenue  growth,  driven  by  higher ARPU, stronger adex contribution and normalisation of operating expenses.

Maintain BUY, MYR3.36  FV.  We understand that in terms of P/E valuation, Astro is trading  at  a  very  high  P/E  as  its  bottomline  is  pressured  by  high  depreciation  and amortisation  expenses.  Nonetheless,  we  still  like  Astro’s  cash-generative  business model which keeps its financial healthy,  while it  is ready for the digital transformation in  the local  media industry. Moreover, its subscription packages  that help advertisers target  different  audience  segments  coupled  with  its  higher  TV  viewership  share  of 46% (+4ppts y-o-y) should boost Astro’s adex revenue and profitability going forward. Hence, we are maintaining our BUY recommendation on Astro, with our MYR3.36 FV based on DCF with a WACC 8.45%.

Financial Exhibits

SWOT Analysis

• Astro  has  the  first-mover  advantage  in  the pay-TV business in Malaysia. It continues to expand  by  offering  various  value-added services and through strategic partnerships

Company Profile
AMH is the largest pay-TV operator in Malaysia.

Recommendation Chart

Source: RHB