• BUY, lower DCF-derived MYR1.17 TP from MYR1.37, 25% upside, c.8% dividend yield. Astro Malaysia’s 1QFY23 (Jan) results were in line and characterised by seasonality. We see downside risks to earnings from heightened inflationary woes, with FY23-25F core earnings tempered. The group’s digital pivot and transformation plans remain key earnings catalysts, alongside concerted efforts to combat piracy. Astro trades at inexpensive 4.7x FY24F EV/EBITDA (1.5SD below historical EV/EBITDA mean).

• 1QFY23 core earnings fell 9% QoQ as weak revenue seasonality (lower adex) and higher financing charges (+54% QoQ) more than offset the 3% EBITDA margin uplift. This formed 21% of our forecast (consensus: 23%) with 1Q being a low ebb. A 1.5 sen first interim DPS puts payout at 55%.

• Subscription revenue clipped a further 1.5% QoQ (-6% YoY) as the 2.1% decline in TV subs base (weaker discretionary spending) more than offset stronger ARPU (from new packages unveiled in Nov 2021 and the upselling of fiber broadband). GO Shop (commerce) revenue slumped 53% YoY (-19.3% QoQ) from inflationary threats, and as shoppers returned to brick and mortar stores. We gather ZEE5 and BBC iPlayer are next in the line up of streaming video on demand (SVOD) services to be integrated/aggregated, which should further bolster content value proposition. Astro said the bulk of its fiber broadband customers are on the content bundle (launched in Mar) with good momentum seen on the standalone fiber service (unveiled in May).

• Forecast adjustments. We cut FY23-25F core earnings by 6-10%, mainly to factor in the downside from heightened inflationary woes on discretionary spending, renewed adex headwinds, and adjustments to our GO Shop assumptions. Astro has hedged its content costs for the next 12 months at MYR4.20-4.25. Content cost should ramp up in 2HFY23, driven by the quadrennial 2022 World Cup broadcast (21 Nov to 18 Dec) with content cost/TV revenue guided at 37% for the full year (sporting year).

• Pirates beware. The amended Copyright Act (gazetted in Feb 2022) criminalises the sale of illegal set-top boxes and the distribution of copyright content. Enforcement remains key with more concerted efforts being made with authorities to hone in on establishments broadcasting pirated content.

• ESG & key risks: Inflationary pressures impinging on consumer discretionary spending, weaker MYR, and protracted subscriber churn are notable risk factors. Astro scores highly on the ESG front with a leading social agenda via the Astro Kampus and Tutor channels on premium TV and NJOI, for which more than MYR126m has been invested in learning content since the inception in FY12. The stock is a constituent of the FTSE4Good Bursa Malaysia Index since 2013.

Source: RHB Research - 22 Jun 2022