Astro’s 1QFY23 core earnings of RM124.9m (-3.7% QoQ, -18.2% YoY) was largely within our (22%) and consensus (24%) expectations. Despite a soft start to the year, we expect a continued recovery in adex spending as economic activities recover as well as better commercial subscriptions following the opening of international borders. Moreover, with the recent launch of addressable advertising on linear TV alongside VOD and Astro’s set-top boxes, we believe these will further contribute to earnings recovery in the subsequent quarters. Maintain BUY with a lower DCF-based TP of RM1.34 (WACC: 8.6%, TG: 0%) from RM1.40. Additionally, Astro yields an attractive 8.0%.

Largely within expectations. Astro’s 1Q23 core earnings of RM124.9m (-3.7% QoQ, -18.2% YoY) made up 22% and 24% of our and consensus full year forecasts, respectively. This is largely within expectations as we expect adex to recover stronger in the coming quarters from the reopening measures. 1QFY23 one-off adjustment includes forex loss of RM24.9m.

Dividends. Declared first interim dividend of 1.25 sen/share (1QFY22: 1.5 sen/share) (ex-date: 6 July 2022).

QoQ. Revenue decreased by -6.7% due to the declines in the TV (-5.4%), radio (-13.6%) and home shopping (-19.3%) segments. The decrease in TV was due to decrease in adex and subscription revenues. The fall in radio was due to a higher base in the previous quarter as it was boosted by the Chinese New Year period. Further weakness in the home shopping segment was due to customers returning to physical stores to shop as Malaysia enters into the endemic phase. Consequently, core PATAMI decreased by -3.7%.

YoY. Revenue decreased by -9.4% mainly due to the underperformance in home shopping (-53.1%) and TV segments (-4.9%) but partially offset by the expansion in radio (+14%) segment. The contraction in TV was due to lower subscription revenue whereas home shopping segment was impacted by the same reasons as mentioned above. Increase in radio segment was contributed by higher road traffic from a more reopened environment vs SPLY, as well as higher adex during the Hari Raya holidays. However, core PATAMI decreased by a larger margin of (-18.2%) due to higher financing costs.

Outlook. Despite economic activities resuming and Covid restrictions relaxed, Astro recorded a softer quarter due to lower adex in a seasonally softer 1H of the year as well as a slower-than-expected recovery in subscription revenue. However, we expect earnings to rebound stronger in the coming quarters coming from a continued recovery in adex following the recovery in economic activities as well as a rebound in commercial subscription revenue as more hotels resume their subscriptions following the opening of international borders. Astro has also recently launched addressable advertising on linear TV in Jun 2022 alongside VOD on Astro GO and its set-top boxes, allowing Astro to target different advertisements to different demographics during the same air time slot, which should further boost adex revenue. Furthermore, with the Qatar World Cup 2022 starting in Nov later this year, there is a potential boost to earnings from special sports packages as well as further adex opportunities.

Forecast. We update our model for FY22 audited accounts and introduce FY25 forecasts. Post adjustments, our FY24 forecast raises slightly by 1.3%.

Maintain BUY with a lower DCF-based TP of RM1.34 (from RM1.40) as we increase WACC from 7.7% to 8.6% to reflect the interest rate upcycle. We continue to like Astro as we foresee further contributions coming from (i) further uptake of its new bundle packages (content + broadband fibre) as it provides more value and cost savings for customers; (ii) better value proposition of Astro’s content as it aims to become the #1 streaming aggregator in Malaysia with more streaming service partnerships in the pipeline; (iii) continued adex recovery as economic activity increases; and (iv) further recovery in commercial subscriptions (which provides a better margin) as international travel resumes for Malaysia. Additionally, Astro currently provides an attractive dividend yield of 8.0%.

Source: Hong Leong Investment Bank Research - 22 Jun 2022