This article first appeared in The Edge Financial Daily on December 7, 2018

Astro Malaysia Holdings Bhd
(Dec 6, RM1.38)
Maintain outperform with an unchanged target price (TP) of RM2: Despite reporting a flat revenue (-0.9% year-on-year [y-o-y]), Astro Malaysia Holding Bhd’s third quarter of financial year 2019 (3QFY19) net profit grew by 4.5% y-o-y, largely lifted by lower content costs, licence, copyright and loyalty fees and impairment of receivables. Adjusting for the unrealised foreign exchange (forex) loss, 3QFY19 core net profit came in at RM178.2 million (+31.7% y-o-y). Nine months of FY19 (9MFY19) core net profit of RM403.5 million (-28.7% y-o-y) came in above our expectations, making up 82% of full-year forecast but below consensus at 69%. The discrepancy was mainly due to the lower operating expenses such as content costs as the group has been continuously renegotiating for better terms with its third-party content providers.

We raised our earnings by an average of around 7% for FY19 forecast (FY19F) to FY21F to account for the lower operating costs given the group’s efforts in optimising its key operating expenses. We maintain our “outperform” call with an unchanged TP of RM2. The group declared a third interim dividend per share (DPS) of 2.5 sen.

3QFY19 revenue continued to remain flat as the decline in TV subscription revenue and radio revenue was offset by higher merchandise sales and advertising revenue. Total customers increased 6% y-o-y to 5.7 million or 76% of Malaysian households, primarily driven by NJOI. Pay-TV average revenue per user declined to RM99.90 in 9MFY19 (9MFY18: RM100.70). TV revenue drop 2.4% y-o-y as the decline in subscription revenue (lower package take-up) was offset by the growth in advertising revenue (advertising spend on telecommunication companies and new device launches). Meanwhile, radio revenue dropped by 11.1% y-o-y due to lower client advertising spend. Home shopping revenue grew 35.1% y-o-y, mainly driven by the increase in number of products sold. In addition, the segment saw its customer base grew by 35% y-o-y to 1.6 million.

E-commerce and lower costs are seen to support earnings growth. Despite recording lower revenue, TV profit before tax (PBT) grew 11.2% y-o-y due to lower content costs, licence, copyright and loyalty fees, and impairment of receivables. In line with the decline in revenue, radio PBT slipped by 5.7% y-o-y in 3QFY19. After three years in operations, the home shopping segment has started to become profitable, registering RM0.5 million PBT in 3QFY19.

3QFY19 headline net profit grew 4.5% y-o-y. Excluding the unrealised forex, core net profit jumped 31.7% y-o-y, thanks to the group’s efforts in optimising operating expenses, especially content costs and other key operating costs.

Astro is implementing a strategic review of its business structure, including deeper cost rationalisation and workforce optimisation. While this would book in potential one-off expenses in the coming months, we are positive on the long-term cost savings, productivity improvement and more effective redeployment of its resources. In tandem with its strategy, the group has announced the cessation of operations of Tribe over-the-top service and live-streaming platform Tamago in view of the challenging landscape. We understand that any cost savings from the closure will be reallocated to its growing home shopping business. — PublicInvest Research, Dec 6