1HFY15  earnings  were  stronger  than  our  estimates  but  in  line  with consensus.  As  we  tweak  our  earnings  forecast  higher,  we  arrive  at  a new  DCF-based  FV  of  MYR3.55  (vs  MYR3.45),  a  5%  upside.  Maintain NEUTRAL.  Astro’s  ARPU  grew 3.3% y-o-y to MYR98  and it  continued to generate strong  free cash flow  of  MYR624m.  The  FIFA World Cup  also drove  viewer  numbers  to  a new record high. Astro also declared a 2.25 sen dividend. 

In line.  Astro Malaysia (Astro)’s  MYR266m  1HFY15 net profit  (+25% yo-y)  was  better  than  our  estimates  (but  within  consensus),  making  up 57% of our full-year forecast. Revenue grew 12.5% y-o-y on the back of higher  TV  penetration  rate  (+13ppts  y-o-y),  better  ARPU  of  MYR98 (+3.3% y-o-y)  and  higher  advertising expenditure (adex)  revenue (+7% y-o-y)  –  fuelled  by  the  2014  FIFA  World  Cup,  which  drove  viewernumbers  to  a  new  record  high.  EBITDA  expanded  15%  y-o-y  to MYR903m,  and  the  company  also  continued  to  generate  strong  free cash  flow ,  generating  MYR624m  in  total  (235%  of  net  profit)  as  at 1HFY15.  

Dividend payout ratio rises. Astro raised its dividend payout by 12.5% to 2.25 sen (from 2.0 sen  in 2QFY14, same as 1QFY15) to reward its shareholders.  This  represents  a  96%  dividend  payout  ratio  of  1HFY15 EPS. The annualised dividend yield is  about 2.7%, excluding a possible final dividend that may be declared in 4Q. 

Earnings  growth  on  track.  Astro  continues  to  deliver  a  promising growth trend and beat  our earlier forecast, which was on a  conservativestance.  Management also guided that its five-year  expansion plans are on  track,  with  margin  continuing  to  improve.  We  raise  our  earnings forecasts slightly by 12%/16% for FY15/FY16 respectively.

Maintain NEUTRAL, while outlook remains positive. We are keeping our  NEUTRAL  call  on  Astro.  We  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  and that it  is  yielding  positive  returns  from  those  investments. We  derive  a higher  DCF-based FV of MYR3.55  (from MYR3.45), after tweaking  our earnings forecast upwards.

Results Highlights

Key takeaways from conference call. Below are some of the key highlights of the conference call with Astro’s management on the 1HFY15 results announcement:

Management highlighted Astro’s five-year  expansion plans, which mainly  centreon its reinvestment to drive double-digit growth since  its  IPO has been on track. The main reinvestment so far includes the swap-out of the set top boxes (STBs), in  which  90%  of  its  subscribers  are  now  on  the  B.yond  platform.  Also,  Astro launched a new satellite on 11 Sept, and targets to add another 18 transponders (from  the  current  18  transponders)  to  cater  for  more  content  transmissions  to drive growth.

Growth in ARPU is mainly attributable to its top-tier custom ers who subscribed to the value-added services. 

The  FIFA  World  Cup  and  other  tournaments  are  very  helpful  in  growing  the viewership  It  also  helped  to  generate  higher  other  income  for  Astro,  as  it shared/sold  several sports matches to  other operators. Content costs were the highest  in  2Q  due  to  FIFA  World  Cup.  Moving  forward  to   2H,  management expects content costs to normalise to 32% of the TV revenue, down from 35%. 

Adex has  been soft for the year due to the  tragic  plane  crash incidents in 2014.Nonetheless,  Astro  believes  that its  adex  revenue  still  has  room for  growth  as the TV viewership has been growing strongly.

Management  also  addressed  the  potential  threat  from  Internet  TV-based operators such as Netflix (NFLX US, NR), which  may potentially affect its Pay TV market. Management thinks that  Astro on the Go, which enables subscribers to access  their subscriptions and view content on demand,  is  as good  as Internet TV-based platforms. Hence, they should not pose a major concern. 

Astro  continues to see strong demand in the internet protocol television (IPTV) business, but it is still facing operational challenges in installation slots. The team is currently  working  closely  with  Maxis  (MAXIS  MK,  SELL, FV:  MYR6.00)  and Telekom Malaysia (TM MK, NEUTRAL, FV: MYR6.10) to resolve the issues.

Management  provided  updates  on  its  home  TV  shopping  business,  which  itexpects  to  launch in November. It will start  with  the  Home Shopping channel on TV, which  will  likely  be followed by mobile apps as well as internet platform to penetrate the e-commerce space.  

The  impact  of  the  goods  and  services  tax  (GST),  which  is  scheduled  to  be implemented  in  April   2015,  is  fairly  muted.  This  is  because  Astro  has  already been  charging  the  6%  sales  tax  on  its  services.  Hence,  it  believes  that  the impact  of  weak consumer sentiment arising from subsidy rationalisation may be minimal as well.

Its outlook remains  positive and management guided that it is targeting to growEBITDA  margin  to  40%  within  the  next  three  to  four  years.  It  plans  to  keep margin  growing  via  effective  cost management  and  by focusing on the  growth segment.

Maintain NEUTRAL, with positive outlook  remaining  intact.  We are keeping our NEUTRAL recommendation on Astro. We 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  and  that the  company  is  yielding  positive returns from  those  investments. We  arrive  at  our  new  DCF-based  FV  of  MYR3.55(from MYR3.45) on tweaking our earnings forecast higher

Source: RHB