We met with Astro recently to get an update on its business operations and strategies moving forward. We found out that Astro’s current strategy to accelerate efforts in the digital space, while not abandoning traditional channel is working for their top and bottom lines. We believe Astro is well positioned across key customer products and segments. We revised our FY19-21 financial forecasts higher by 2-4% and maintain BUY with slightly lower TP of RM1.70 based on DCF valuation (WACC 8.0%, TG 1%).

Still resilient. On the back of the recent improvement in Consumer Sentiment Index post GE14, we believe Astro’s earnings will remain resilient, capitalizing on its double edged strategy of digital and subscription base revenues, backed by is 5.6m household customers. In addition, the home shopping segment is experiencing tremendous growth stemming from its JV partner strategy.

Pay-TV segment. Challenges are expected to persist in this segment as Astro expects growth in premium subscribers to be sustainably muted. Astro is focusing on upselling NJOI and monetising further through more prepaid consumption and slowly converting more NJOI subscribers to its pay-TV platform. NJOI is able to catch a wide audience base and is benefitting adex with more than 2.3m NJOI customers and expects the customer base to grow higher than its FY18 growth of 18%.

Piracy issue. Astro regards that OTT players are less of a threat to its business model as Malaysians generally still unable to afford a smart TV and prefer local content. Astro perceives that piracy issue off its set top box has a more profound disruption to its business model. On the other hand, Astro shared that the piracy issue could benefit their cost structureas Astro managed to negotiate the content cost lower for the international contents affected by piracy issue.

Cost rationalisation to continue. Astro embarked on a cost cutting exercise that yielded positive results in 3QFY19. Astro expects more cost rationalisation exercise through various lines (marketing, content, personnel and administrative) that will result in long term cost savings and improvement in productivity. The full blown impact from VSS via a one-off expense is expected to be felt in FY20.

Competition for sports right. We believe that the ability to retain subscriber for sport package lies on its crown jewel, English Premier League broadcast. However in recent a development, Facebook has secured a right to stream Premier League from 2019-2022 in neighbouring countries and we do not discount the possibility of Facebook to strike a similar deal in Malaysia when Astro’s current deal expires in 2022.

Change to forecast. Following the transfer of analyst coverage, we introduce a new set of financial forecast and we revised our financial forecast higher by 2-3% in FY19- FY21.

Maintain BUY, TP: RM1.70. While our earnings are raised, our DCF based TP (WACC: 8%, TG: 1%) is reduced slightly from RM1.83 to RM1.70 mainly due to working capital adjustments. We like Astro for its resilient revenue generation from subscription revenue, steady adex outlook and the ability to increase ARPU. Besides that, the group also pays out very generous dividend which translates to a yield of 7.0%.

Source: Hong Leong Investment Bank Research - 18 Jan 2019