Review

• Excluding exceptional items, Astro’s 1HFY20 core net profit of RM353mn (+56.5%) came above ours and consensus estimates at 58.6% and 56.6% respectively. Results surprised on the upside as on-going cost optimisation initiatives, mainly in the area of manpower, during 2QFY20 led to lower-than-expected opex. In this regard, we now expect higher earnings growth of 14.3% in FY20 versus 7.0% previously.

• A 2nd interim dividend of 2.0sen/share (-20.0%) was declared. This brought YTD’s to 4.0sen/share (-20.0%), representing a payout ratio of 60.4% against reported EPS of 6.6sen/share. That said, given the group’s dividend promise of paying at least 75% of earnings, we remain our conviction on Astro as an attractive dividend play with our unchanged FY20-22 dividend forecast of 10.5sen/share (77-87% of PATAMI) at current levels implying attractive forward yield of 7.8% (versus consensus of 7.2-7.4%). Providing comfort, the group’s dividend capacity is backed by its free cash flow yield of 14.4-15.7%. Furthermore, except for FY18, it has a historical payout ratio of above 100% over the years.

• YoY. Essentially, the operating environment remained challenging for Astro with its 1HFY20 revenue lower 9.4% to RM2,471mn, dragged mainly by the core Pay-TV business and partially by lower contributions from adex and home shopping. However, on the back of typically lower content cost during the non-major sporting year and opex savings from on-going cost optimisation initiatives, EBITDA margins expanded 7.2pp to 35.9% and core net profit jumped 56.5% to RM353mn. Spending on content was well in check with 1HFY20’s content cost as a percentage of TV revenue at 33% trailing management’s guidance for FY20’s at 34-35%. Meanwhile, Pay-TV ARPU was resilient at RM100.0/month (+0.1%).

• QoQ. Encouragingly, following 3 consecutive quarters of sequential contraction, revenue in 2QFY20 improved marginally 0.2% QoQ to RM1,236mn. Apart from higher contributions from adex and home shopping during the Hari Raya Aidilfitri festivities, note that the improvement was also supported by the moderated decline in Pay-TV subscription revenue (-0.3% QoQ), which if sustained in the quarters ahead, perhaps indicate that management’s strategy to focus on profitable Pay-TV customers is paying off. Meanwhile, due to the increase in content cost with content cost as a percentage of TV revenue at 35% (+4pp QoQ), EBITDA margins eased 1.3pp QoQ to 35.3% and core net profit declined 8.6% QoQ to RM168mn.

Impact

• We raised our FY20/FY21/FY22 earnings estimates by 6.9%/12.7%/13.4% to RM643mn/RM630mn/RM713mn after lowering our cost assumptions to reflect the lower-than-expected opex. Correspondingly, our forecasted EBITDA margins is increased by 2.9-3.0pp to 33.4%/31.7%/33.4%.

Outlook

• Despite the still challenging Pay-TV market, we expect Astro to record earnings growth in FY20, underpinned by lower content costs, continued monetisation from NJOI (freemium) customers, as well as leaner opex on the back of on-going cost optimisation initiatives. Of note, management remains optimistic on the monetisation opportunities from NJOI customers with a strategy of focusing on their interest in sports and vernacular content as well as simplifying their path to purchase content via collaboration with telcos.

• Meanwhile, in efforts to defend its customer base, the group has been working on enhancing customer experience. This was observed with the recent refresh of Astro GO’s user interface in July 2019, which features content centric categorisation, enhanced search capabilities, and personalised recommendations. Management also alluded that in the coming months Astro will be launching its Ultra Box, which offers customers 4K-Ultra HD viewing experience and cloud recording features.

• More importantly, anchored by its niche in the creation of vernacular content, which provides an edge against competition, we believe that the group will continue to have a grasp on the majority of Malaysia’s TV households. In 1HFY20, Astro recorded a TV household penetration rate of 76% with a TV customer base of 5.7mn (+1%) comprising of Pay-TV and NJOI customers.

Valuation & Recommendation

• In all, we reiterate our Buy recommendation on Astro with a higher TP of RM1.80/share (previously RM1.60/share) based on WACC of 8.7% and a long-term growth rate of 1%. The stock at current levels offers investors attractive forward dividend yield of 7.8% across FY20-22 (consensus: 7.2-7.4%). Key downside risks include an unprecedented decline in Pay-TV ARPU and customers, as well as heightened competition from alternative over the top services and on-going piracy.

Source: TA Research - 13 Sept 2019