Astro’s  9MFY15  (Jan)  earnings  were  in  line  with  our forecasts  but  on the  low  end  of  consensus  estimates.  We  maintain  our  NEUTRAL  call and  DCF-based  MYR3.55  TP,  a  6.6%  upside.  ARPU  grew  3%  YoY  to MYR98.50  while  delivering  free  cash  flow  of  MYR1.06bn  YTD.  Astro’s subscriber  base  grew  37%  YoY  while  both  revenue  and  EBITDA recorded double-digit YoY growth.

In  line.  Astro  Malaysia’s  (Astro)  9MFY15  net  profit  of  MYR379.4m (+12.6%  YoY)  was  within  our  forecasts  but  on  the  lower  end  of consensus  estimates.  It  made  up  73.2%  of  our  full-year  forecast. Revenue  grew  10%  YoY,  led  by  better  TV  penetration  rate  (+13ppts YoY),  higher  ARPU  of  MYR98.50  (+3%  YoY)  as  well  as  higher advertising  expenditure  (adex)  revenue  (+4%  YoY).  Subscriber  base grew  37%  YoY  to  410,000.  EBITDA  expanded  10.7%  YoY  to MYR1.33bn while free cash flow stood at MYR1.06bn (279% of PAT).     

Dividend payout ratio rises.  Astro raised its dividend payout by 12.5% to 2.25 sen (from 2.0 sen in 3QFY14, the same as 2QFY15) to reward its shareholders. This represents a 93% dividend payout ratio on 9MFY15’s EPS.  The annualised dividend yield is about 2.7%, excluding a possible final dividend that may be declared in 4Q.

Forex  risk.  Management  guided  that  FY15  earnings  will  be  minimally impacted by the weakening of the MYR against the USD,  as Astro has prudently hedged most of its USD exposure until 3QFY16.

Higher  non-recurring  expenses.  Total  operating  expenditure normalised in 3QFY15,  but higher administrative expenses led to lower QoQ earnings.

Maintain NEUTRAL. We are keeping our NEUTRAL call on Astro. While we  believe  that  the  company  will  begin  to  enjoy  the  yields  from  the completion of its heavy capex investment cycle, we feel that current price levels have fairly valued the stock. Our  DCF-based MYR3.55 TP (a 6.6% upside) is based on a WACC of 8% and terminal growth rate of 1%

Results Highlights
Key takeaways from conference call. Below are some of the key highlights of the conference call with management on the 9MFY15 results announcement:

Revenue  for  3QFY15  was  weaker  QoQ,  as  the  monetisation  of  World  Cup rights that were sold to other operators in 2QFY15 rolled over.  Content costs have also normalised to 33% of revenue for the quarter.

Administrative  expenses  for  3QFY15  were  slightly  higher  than  expected. Management  has  guided  that  the  rise  was  down  to  the  timing  of  a  one-off professional fee.

The  3QFY15  churn  rate  of  10.3%  was  higher  than  the  previous  quarter.  Asubstantial  percentage  of  the  churn  directly  led  to  the  increase  in  NJOI subscription, Astro’s subscription-free satellite services. 

Net additions for NJOI jumped 114% to 371,000 households YoY, led by higher penetration into markets with low pay TV penetration rate  like   East Malaysia, and certain areas in southern and northern West Malaysia.

Management  remains  steadfast  in  its  conviction  that  the  earnings  growth strategy employed,  which focuses on more price-resilient, premium customers,will  help  Astro’s bottomline to weather the uncertain macroeconomic conditions going forward.

Nevertheless, management also said that  Astro  has  employed a more stringent policy  with  regards  to  customer  subscription  to  pre-empt  softer  consumer sentiment, in reference to the increase in 3QFY15’s churn rate.

Management also guided that FY15 earnings will  be minimally impacted by the weakening of the MYR against the USD, as Astro has prudently hedged most of its USD exposure until 3QFY16. Should the weak MYR persist against the USD for FY16 and FY17, we predict a sensitivity of roughly MYR10m earnings for an inverse  movement  of  every  RM0.10  in  the  USD/MYR  exchange  rate. (USD/MYR assumptions – FY16: MYR3.35, FY17: MYR3.35)

Management provided updates on its home TV  shopping business, which  was soft launched in November, noting the early positive surprises  on the volume of products  purchased through  the platform. The  home TV  shopping business is expected 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 through TV carriage, studio and call centre leasing charges.

Astro has also posted a 4.0%  YoY  rise in adex despite the challenging market conditions, led by an 8% growth in radio adex and 1% growth in TV adex. 

Management also noted the tough operational challenges faced in  its  internet protocol television (IPTV) business. Astro has reiterated its commitment to work with Maxis (MAXIS MK, NEUTRAL, TP:  MYR6.35) and Telekom   Malaysia  (TM MK, NEUTRAL, TP: MYR7.00) to resolve the issues.

Source: RHB