• Keep BUY and MYR0.84 TP (DCF), 27% upside and 9% forward dividend yield. Astro Malaysia’s results were broadly in line, with the quarter characterised by seasonality. We expect core earnings to stage a rebound in FY24 (Jan) from lower content cost and cost efficiencies. In our view, a potential re-rating catalyst could well come from a privatisation. At current levels, prospective FCF and dividend yields are attractive at over 15% and 9%. A 4% ESG premium has been incorporated into our valuation based on our in-house screening methodology

• Seasonality effect. Overall revenue was down 10% sequentially and 7.4% YoY on weaker advertising expenditure, subscription revenues, and home shopping sales. EBITDA, however, rallied 35% from the high base of content costs (World Cup 2022 rights) booked during the previous quarter with content cost/revenue easing to 34% (4QFY23: 49%). Revenue and EBITDA made up 21-23% of our and Street’s forecasts while core earnings (15-16% of our and market estimates) were distorted by a higher effective tax rate, which we expect to normalise in the ensuing quarters. A 0.25 sen DPS was declared (21% payout) with the 75% payout guidance reaffirmed for the full year.

• ARPU was up for the second consecutive quarter despite the challenging economy. A key highlight at the results call was the good traction of Sooka, Astro’s streaming video-on-demand service that appeals to the younger generation and cord-nevers. Management also said two-thirds of new customers are under the age of 40 while 25% are on new the set-top boxes – Ultra and Ulti – which offer superior viewing experience with lower churn. ARPU ticked up further to MYR98.70 in 1QFY24, supported by a higher take-up of on-demand services and broadband bundles. Meanwhile, broadband and enterprise customers grew 28% and 12% YoY.

• Lacking outright catalysts; stock has outperformed after hitting historic lows. Our forecasts are maintained for now. Astro’s predicaments are well acknowledged. Structural issues (cord-cutting) and heightened inflationary pressures continue to make it difficult for the group to stem the subscription revenue decline. Its transformation initiatives are less appreciated, as is the strong position taken on piracy, with more court cases profiled on the sale and distribution of illicit streaming devices in the media. We think a potential re-rating catalyst could well come from a privatisation by its major shareholder. At current levels, prospective FCF and dividend yields are attractive at over 15% and 9%. Overall, the stock’s risk-reward is positive, with valuation at 1.5SD below historical EV/EBITDA mean. Key downside risks are the extended macroeconomic headwinds, weaker-than-expected earnings, and protracted decline in subscription revenues.

Source: RHB Securities Research - 20 Jun 2023