Review

• Astro reported a 9MFY17 profit of RM501mn (+8.6% QoQ, -0.1% YoY). This was slightly above ours, but within consensus expectations at 80.6% and 77.0% respectively. A third interim dividend of 3.0sen/share (YTD: 9.0sen/share) was declared.

• It was a good set of results given existing circumstances. Despite a flattish top line, earnings beat our estimates on lower content costs (-4.7% QoQ) and impairment of receivables. The Pay TV market remained challenging, recording its third consecutive quarter of subscriber churns (-51k). However, this was partly offset by higher Pay TV ARPU of RM99.9 due to price revisions on its sports packages. Its home shopping business reported lower revenue (-16.2% QoQ), following festive season promotions conducted in the previous quarter.

• YTD. Revenue increased 3.5% YoY. Bucking industry trends, TV adex and radex grew by 15.2% YoY and 11.0% YoY, as it gained market share against its competitors. Go Shop revenues posted a 57.5% YoY increase, and is expected to be EBITDA neutral by the end of the year.

• Held by weak market conditions, Pay TV subscriptions revenues were flat from the previous year. A net decrease of 91k subscribers were offset by a 0.6% YoY increase in Pay TV ARPU to RM99.9. As a sign of assurance, its high value subscribers remain intact, although there were some down trading activities. NJOI subscribers continue to gain good traction, increasing by 416k subscribers. Monetisation of this subscriber base represents a key opportunity, with NJOI ARPU still low at RM1.70. Showing positive trends, prepaid take up has increased to 2.2mn vs. 1.3mn in the previous year.

• EBITDA fell by 4.4% YoY. This was largely due to higher content costs (+10.7% YoY) from the double sporting year. For FY18, 70-75% of content needs have been hedged well below current spot rates. The remainder will be hedged when exchange rate normalises.

Impact

• We make the following changes to our earnings estimates: 1) Revise pay TV subscription numbers to reflect flattish subscriber base and ARPU. 2) Adjust FY18 content cost to guidance of between 34-35% of TV revenue.

• We adjust our FY17/FY18/FY19 earnings by +6.6%/+9.5%/-1.0% to RM662.7mn/RM767.1mn/RM766.0mn.

Outlook

• We expect a better FY18, driven by lower content costs. Coming off a double sporting year, content cost is expected to moderate to 34-35% of TV revenues in FY18. Pay TV will remain challenging, as we expect flattish to declining revenues. The group is aiming for zero net adds, but does not discount the possibility of a 50k decline in Pay TV subscribers. Instead, growth will come from its increasing adex market share and home shopping business. Astro Go Shop is targeting to grow its revenues to RM500mn. Efforts to achieve this include an increase in product breadth, live hours, premium delivery options and more payment options.

Valuation

• We value Astro at a lower TP of RM3.30/share (previously RM3.40/share) – based on a DCF valuation with WACC at 7.0% and long term growth rate of 1.0%. Our TP is lowered slightly based on our more flattish Pay TV subscriber growth assumption. We continue to like the stock for its resilient earnings in a challenging media industry. This is underpinned by its pay TV subscription model and ability to grow adex market share. Meanwhile, valuations remain attractive as it trades 1SD below its average EV/EBITDA at 8.6x. Forward yields are also attractive at 4.7-5.1%. BUY.

Source: TA Research - 8 Dec 2016