Astro’s 1QFY15 earnings were  within  our  and  consensus  estimates. ARPU  grew  3%  y-o-y  to  MYR97.10,  and  Astro  continued  to  generate strong  free  cash  flow  of  MYR282m.  The  impact  of  the  FIFA  World  Cup on  revenue  and  content  cost  may  kick  in  by  2QFY15,  but  management is  positive  on  the  outlook.  It  raised  its  dividend  by  12.5%  to  2.25  sen. Maintain NEUTRAL, with MYR3.45 FV.

In  line.  Astro  Malaysia  (Astro)’s  1QFY15  net  profit  of  MYR128.3m (+12.4%  y-o-y)  was  within  our  and  consensus  expectations,  making  up 27% of our full-year forecast. Revenue grew 11.4% y-o-y on the back of a  higher  TV  penetration  rate  (+5ppts  y-o-y),  average  revenue  per  user (ARPU)  rose  to  MYR97.10  (+3%  y-o-y)  as  well  as higher  adex  revenue (+6% y-o-y). EBITDA expanded 16% y-o-y to MYR441m. The company also  continued  to  generate  strong  free  cash  of  MYR282m  during  the quarter under review.

World  Cup  effect  may  kick  in  in  2QFY15.  The  revenue  growth  and increment in content cost stemming from the FIFA World Cup 2014 may be  seen  in  2QFY15,  and  management  is  optimistic  that  the  numbers would  potentially  look  healthy.  Astro  rolled  out  several  packages  for football fans to watch the matches, and viewership has so far been very positive.

Dividend payout ratio rises. Astro raised its dividend payout by 12.5% to 2.25 sen (from 2.0 sen) to reward its shareholders. This represents a 90%  dividend  payout  ratio  of  1QFY15  EPS.  The  annualized  dividend yield  is  about  2.6%,  excluding  a  possible  final  dividend  that  may  be declared in 4Q.

Maintain NEUTRAL, while outlook remains positive. We are keeping our NEUTRAL recommendation on Astro and advise long term investors to  stay  invested  in  the  company  as  we  believe  its  long-term  future remains  bright,  especially  after  its  heavy  capex  investments  are completed.  We  make  no  changes  to  our  earnings  forecast  at  this juncture, given that Astro’s earnings and growth guidance are still in line with our forecast. We also keep our DCF-based FV of MYR3.45.

Key Highlights

Key takeaways from conference call.  Below are some of the key highlights of  the conference call with Astro’s management on the 1QFY15 results announcement: 
- Management  guided  that  its  year-end  ARPU  target  of  MYR100  remained unchanged. 
- ARPU growth for the quarter under review was mainly from its premium users – which recorded a 5% growth y-o-y. 
- It  continues  to  see  strong  demand  in  the  internet  protocol  television  (IPTV) business, but Astro is still facing operational challenges in installation slots. The team is currently working closely with Maxis (MAXIS MK, SELL, FV: MYR6.00) and Telekom (TM MK, NEUTRAL, FV: MYR6.10) to resolve the issues. 
- Net adds for NJOI, its subscription-free satellite service, jumped by 53% due to a higher  penetration  into  markets  with  low  pay  TV  penetration  rate  such  as  East Malaysia, and certain areas in the southern and northern Peninsular Malaysia. 
- The 1QFY15 churn rate of 9.9% is not a cause for concern for management as this was within their expectation. Moreover, Astro commands more than 90% of the pay TV market in Malaysia, and has a high TV household penetration rate of 58% as well as TV viewership share of 47%. 
- Management  provided  updates  on  its  Home  TV  Shopping  business,  which  it  is targeting  to  launch  in  4QFY15  and  which  it  expects  to  generate  MYR500m  in revenue by the fifth year, and will showcase the products on high-definition (HD) channels.  Showcasing  products/usage  of  the  products  will  not  incur  additional expenses over its content cost, as these will be produced in Astro’s own studio. Once  the  business  matures,  Home  TV  Shopping  may  also  bring  in  revenue  of about  MYR200m,  such  as  TV  carriage  charges,  studios  charges  and  leasing 
charges from its call center.  
- Management is positive on the contribution from the FIFA World Cup and shared some figures on the viewership of several matches in the first week: 
i.  Mexico vs Cameroon (14 June, Saturday 12am): 1.2m 
ii.  England vs Italy (15 June, Sunday 6am): 900,000 
iii.  Spain vs Netherlands (14 June, Saturday 3am): 800,000 
Astro is confident that its viewership will not be diluted by matches played by free to air (FTA) TV (ie RTM channels) as RTM will only be broadcasting 35 matches (which  does  not  include  all  the  key  matches).  Astro,  on  the  other  hand,  will  be broadcasting all 64 matches, which will be available on HD. This may well meet the demands of football fans.  
Maintain  NEUTRAL,  with  positive  outlook  intact.  We  keep  our  NEUTRAL recommendation  on  Astro  and  advise  long  term  investors  to  stay  invested  in  the company, as we expect its long-term future to be bright once it rolls out all its heavy capex  investments. We  make  no  changes  to  our  earnings  estimate  at  this  juncture, since the company’s earnings and growth guidance are in line with our forecast. We also retain our DCF-based FV of MYR3.45.

Financial Exhibits

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

Astro Malaysia is the largest pay TV operator in Malaysia.

Recommendation Chart

Source: RHB