This article first appeared in The Edge Financial Daily on June 8, 2018

Astro Malaysia Holdings Bhd
(June 7, RM1.65)
Maintain buy with an unchanged target price (TP) of RM2.66: Astro Malaysia Holdings Bhd reported its first quarter of financial year 2019 (1QFY19) results, with a 60% quarter-on-quarter (q-o-q) jump in core earnings to RM179 million on stronger earnings before interest, taxes, depreciation and amortisation (Ebitda) (from the reversal of impairment on receivables) and lower depreciation charges. Earnings, however, fell 5% year-on-year (y-o-y) on weaker TV subscription revenue and higher financing cost. Group revenue was weaker on seasonally lower advertising expenditure (adex) revenue. Overall results were in line, at 26%/26% and 26%/25% of the consensus/our Ebitda and the consensus/our core earnings forecasts respectively. The board announced a first interim dividend per share of 2.5 sen (1QFY18: three sen), payable on July 6, 2018. We make no changes to our forecasts for now.

Some key highlights include an extended decline in TV revenue (-2.7% q-o-q; -5% y-o-y), continued adex outperformance (up 6% y-o-y versus the industry’s gross adex of -1%), which was a reflection of its dominant TV household penetration (1QFY19: 75%) and leading viewership share of 76%, stronger non-discretionary revenues (home shopping, Astro Go and On Demand) and a stable average revenue per user (Arpu) at RM99.60 q-o-q.

Content cost was down 14% q-o-q (-13% y-o-y) on better contract negotiations, or 30% of TV revenue (4QFY18: 34%). Meanwhile, home shopping (Go Shop) revenue narrowed 2% q-o-q (+35% y-o-y) due to the high base of festive spending in 4QFY17, albeit with higher Ebitda losses q-o-q at RM2.3 million.

There will be a World Cup boost in 2QFY19. Astro expects viewership to hit an all-time high from the live (64 matches) broadcast of the Fifa World Cup (June 14 to July 15). This should be supported by favourable kick-off times for most matches, and the improvement in consumer and retail sentiment post-election, which should indirectly bolster out-of-home viewing.

For the first time, non-Astro subscribers will be able to watch the matches live on Astro Go and NJOI Now apps (multi-platform) via the purchase of World Cup passes. Sales of World Cup passes and sports pack upgrades have been encouraging with some 30,000 residential passes transacted and 55,000 sports pack upgrades to date. While we expect Arpu to see an uplift in the following quarter, content cost should also see a spike.

We “maintain” our buy call and discounted cash flow-derived TP of RM2.66. While there remains concerns over the threat posed by competing over-the-top applications, piracy and escalating cost of content, the business in itself is extremely cash-generative with a strong free cash flow, offering capital management headroom. Additionally, the group has strong intellectual property rights with scalable multi-viewing platforms that transcend borders and extend its reach.

We believe the stock has been oversold with prospective valuations at -2.5 standard devitation its historical enterprise value/Ebitda. The depressed valuations have fanned talk of privatisation by its major shareholder, which should lend support to stock sentiment. Astro will cease to be an index stock from June 15 following the recent semi-annual review of the FBM KLCI constituents. — RHB Research Institute, June 7