Astro’s 1HFY16 (Jan) earnings were in line with expectations, at 47% of our and consensus forecasts. Although earnings for the quarter were punctuated by higher forex-related losses, the company recorded a rebound in net pay-TV adds. We keep our NEUTRAL recommendation with a revised TP of MYR3.07 (from MYR3.28, a 3% upside).

1HFY16 results review. Astro’s 1HFY16 earnings were in line with expectations, making up c.47% of our and consensus forecasts. Revenue was up 3.7% YoY while PAT grew 14.8% YoY, led by higher subscriber and advertising revenue as well as lower depreciation of set-top boxes. Nevertheless, on a quarterly basis, 2QFY16 PAT contracted by 18.4% sequentially on the back of higher finance cost that soared to MYR112.3m from MYR58.1m in 1QFY16, due to realised forex losses from the discounting of transponder deposits (MYR12.4m) as well as unrealised forex losses from unhedged transponder lease liability and vendor financing (MYR19.5m). Management has guided that losses from the former is a one-off accounting treatment, and it remains committed to managing the latter’s forex risk.

Rebound in net pay-TV adds. Astro to MYR99.10 vs MYR99 in 1QFY16 while churn fell to 9.8% from 10.3% for recorded a net pay-TV add of 15,000 subscribers in 2QFY16, reversing the negative subscriber growth from the previous quarter. Its ARPU also grew the same duration.

Outlook & forex. Management is focused to deliver value-added products and services to drive growth amidst a challenging operating environment and soft consumer sentiment. It also shared that it has fully hedged its foreign content cost for FY16F as well as for 1QFY17, while asserting to remain vigilant on the remaining unhedged lease liability and vendor financing facilities.

Forecasts & dividends. We trim our FY16 earnings forecast by 2.4% and keep our FY17F and FY18F numbers unchanged. Astro declared a 2.75 sen DPS, implying a rise of 22% from FY15 quarterly dividends.

Maintain NEUTRAL. We expect consumer sentiment to remain subdued for the rest of the year and lift our COE assumption to 9.3% from 8.9% in view of the current slowdown in global economic growth. Per Figure 5, we revise our DCF-based TP to MYR3.07 (from MYR3.28, 9.3% COE, 1% TG) which implies a FY16F P/E of 27.8x. Thus Astro is trading at a premium relative to peers’ multiple range of 8-16x; therefore we reiterate our NEUTRAL recommendation.

Positive Signs Amidst Cautious Outlook

Encouraging adex growth. Astro grew its share of TV and radio adex to 35%/61% respectively during the quarter (2QFY15: 33%/56%). Management shared that greater utilisation of analytics and a closer collaboration with key advertisers contributed to adex growth. While online advertising has the added edge of better data analytics for more accurate consumer segmentation, Astro believes that video advertising remains the most effective means to reach out and influence consumers. This is based on its experience of holding a larger proportion of successful TV advertising campaigns vs online campaigns. Go Shop. Astro’s home shopping venture recorded MYR74m in revenue for 1HFY16, which is on track to meet its full-year target of MYR150m. It managed to ship 380,000 products to 200,000 customers during this time. Cost discipline. Astro addressed concerns on the impact of the weaker MYR on content cost; 65% of content costs are denominated in USD, and Astro is fully hedged for FY16 as well as 1QFY17. Nonetheless, management reiterated its cost discipline commitment to rein in content costs, ie within 32-35% of TV revenue going forward. FX sensitivity. We forecast that Astro has a net USD60m of unhedged exposure for its transponder lease liability and vendor financing facilities. Our sensitivity analysis indicates that a 10% movement in the USD could adversely impact earnings by around MYR25m. Maintain NEUTRAL. While we are pleased to note the rebound in net pay-TV adds, we expect consumer sentiment to remain subdued for the rest of the year due to:

i) post-GST gestation, ii) weaker global economic growth, and iii) domestic political uncertainty. As such, we increase our COE assumption to 9.3% from 8.9%. We also revise our DCF-based TP to MYR3.07 (from MYR3.28, 2.7% upside, 9.3% COE, 1% TG) which implies a FY16F P/E of 27.8x, We opine that Astro is trading at a premium relative to its peers that are trading around 8x-16x. Hence, we reiterate our NEUTRAL recommendation.

Financial Exhibits

SWOT Analysis

Company Profile

Astro Malaysia is the largest pay-TV operator in Malaysia.

Recommendation Chart

Source: RHB Research - 17 Sep 2015