This article first appeared in The Edge Financial Daily on June 27, 2019
Astro Malaysia Holdings Bhd
(June 26, RM1.48)
Upgrade to buy with a higher target price (TP) of RM1.67: Astro Malaysia Holdings Bhd’s first quarter of financial year 2020 (1QFY20) revenue of RM1.23 billion, translated into flattish (+0.5% year-on-year [y-o-y]) core earnings of RM186.6 million (adjusted for unrealised forex loss of RM16 million). This exceeded expectations at 31.9% and 30% of our and consensus full-year forecast respectively.
It declared a first interim dividend of two sen share (ex-date 10 July 2019), translating into a 53% payout.
Quarter-on-quarter (q-o-q), revenue remained lacklustre, dipping by -9.8% to RM1.23 billion. This was mainly attributed to a decrease in subscription revenue (-6.3%) and advertising expenditure (-26%). Home shopping declined for the first time by -15.5% given subdued consumer sentiment. Nevertheless, core earnings increased by 100% from a low base effect. Recall that Astro incurred RM40.6 million unrealised forex loss and RM58 million voluntary separation scheme (VSS) cost in 4QFY19.
Y-o-y core earnings remained flattish (+0.5%), as lower earnings before interests, taxes, depreciation and amortisation (Ebitda) as mitigated by lower net finance cost. Lower Ebitda by 3.9% was weighed by TV (-3.1%) radio (- 10.3%) and Home shopping by -RM1.1 million. TV and radio did not benefit from festive spend for Chinese New Year as compared to the corresponding quarter.
We view that Astro will be able to mitigate the deteriorating subscription revenue by lowering content cost to 33%-34% of revenue (by focus more on vernacular content and less Hollywood content) and reaping the cost savings benefits from its recent VSS exercise. Over the medium to long term, we believe home shopping segment will able to increase its contribution.
We increase Astro FY20 and FY21 earnings by 14% respectively as we impute material savings from cost optimisation efforts and lower content cost. We take this opportunity to introduce our FY22 financial forecast.
Following our earnings forecast increase, we raise our discounted cash flow-based TP (weighted average cost of capital 6.5%, TG 1%) from RM1.59 to RM1.67. While we acknowledge that subscription revenue is on a declining trend, we reckon that the benefits from cost savings (as evident from the current results) may outweigh this, at least in the near term. Coupled with an attractive dividend yield of 7.2%, we opine that the near term risk to reward equation is tilted to the upside. — Hong Leong Investment Bank Research, June 26