- We maintain our HOLD call on Astro Malaysia (Astro) with a lower fair value of RM3.30/share (from RM3.48/share previously), as we account for lower ARPU and Pay TV subscriber growth.

- Astro reported 1Q net profit of RM166.7mil (19% QoQ, 30% YoY), which was within our and market estimates. Notably, its PBT margins increased by 4ppt YoY.

- Astro declared an interim dividend of RM2.75/share (+18% YoY), in line with its progressive dividend policy.

- Strong 1QFY16 performance came from both the TV and radio segments. It is also attributed to the decrease in depreciation of STBs, and amortisation of software and financing costs compared to 1QFY15.

- Astro’s key TV segment was buoyed by the higher Pay TV ARPU at RM99 (vs. RM97.10 in 1QFY15) as well as higher Pay TV adex (+RM5.5mil). The increase in Pay TV adex enjoyed is in line with earlier media reports which noted a significant increase of adex share in 1Q. We believe it may continue to trend positively due to Pay TV’s ability to target customers effectively.

- However, weaknesses in Astro’s key statistics allude to the difficulties ahead, mainly due to the low consumer sentiment as they adjust to the new GST tax.

- 1Q churn grew slightly higher to 10.3% (vs. 9.9% previously) which saw Pay TV subscribers decline by 5k. ARPU still stood at RM99, while its high margin Superpack subscribers deteriorated by 8k. Management guided that this trend may likely continue for 6-8 months before recovering, but it still maintains its FY15F targeted Pay TV net adds at 50k and FY15F ARPU at RM100- RM101.

- On a more positive note, its merchandising segment continued to grow strongly, registering revenue of RM37mil (+48% QoQ) from its larger customer base of 160k. The segment is expected to break even in 2016.

- To address new competition from new media incumbents, Astro is planning to increase its Astro On The Go service value proposition through increased content as well as capabilities for downloading onto mobile devices. AOTG’s connected subscriber base lies at around 700k.

- We note also that Astro’s USD denominated content costs have been hedged until the beginning of FY17F.

- Overall, Astro’s outlook in FY16F looks challenging due to the poor consumer sentiment which will continue to impact its Pay TV net adds and hinder ARPU growth.

- Astro currently trades at 24x FY16F PE, slightly below its 3 year average of 26x.

Source: AmeSecurities Research - 17 Jun 2015