FY20 CNP of RM657m was 17% stronger than FY19 on better cost mix but missed our estimates on overly bullish top-line expectation. Dividends also missed and were below the group’s payout policy to allow better management amidst Covid-19 challenges. Further near-term hurdles include poorer customer acquisition, delay in major sporting events and dents from rising forex. That said, yields are still attractive at 9-12%. We switch to a more reactive PER valuation, lowering TP to RM0.900 (from RM2.00) but maintain our OP call.

FY20 missed our expectations, but is in line with consensus, as normalised PATAMI of RM657m accounted for 92% and 96% of respective full-year estimates. The negative deviation was mainly due to lower-than-expected top-line from overly optimistic subscriber expectations. A final dividend of 1.5 sen was declared, for a full-year payout of 7.5 sen. This is below our anticipated 9.0 sen due to the lower earnings which is also below minimum payout ratio of 75%. Management commented that the decision was to better manage cashflow amidst the challenging environment brought by the Covid-19 pandemic and movement control order.

YoY, FY20 revenue declined further by 10% to RM4.91b, mainly from weakness in key television subscription (-10%). ARPU showed marginal improvement to RM100/mth (from RM99.90/mth) against a slight dip in its total TV customers (-<1%), indicating a better subscription mix. EBITDA improved to RM1.72b (+7%) as content cost was more favourable, in the absence of major sporting event (i.e. FIFA World Cup). Core PATAMI registered at RM657m (+17%), adjusting for FY19 one-offs of c.RM100m from revaluation of lease liabilities and employee separation schemes.

QoQ, 4QFY20 revenue slightly increased to RM1.23b (+1%) but EBITDA fell by 16% as higher expenses were incurred partly in conjunction with the launch of the Ultra Box during the quarter. 4QFY20 Core PATAMI was lower by 27% due to higher effective taxes recognised.

Bracing for a rocky road. The group has worked hard in churning new offerings, most recently with the launch of the new Ultra Box to enhance the viewing experiences of its subscribers and bundling packages with telcos for more value-for-money propositions. Additionally, partnerships (iQIYI) allow their subscribers access to a wider range of content. That being said, the recent Covid-19 pandemic could put a dent in its customer acquisition efforts. The outbreak has also led to the delay in sporting events earmarked for the year (i.e. Tokyo Olympics, Euro 2020). While this may affect seasonal viewership, the silver lining is that the respective program costs have yet to be transacted, to be deferred to FY22 when it will be featured. However, the higher USD rates could spell some imported content cost pressures in the medium term.

Post-results, we toned down our FY21E earnings by 4% on more conservative top-line assumptions. Although the delay of CY20 sporting events will be less stressful to costs, top-line could be undermined by slower economic activity in the country.

Maintain OUTPERFORM with a lower TP of RM0.900 (from RM2.00). Our lower target price is based on a change in methodology from DCF to a 9.0x FY22E PER (1.5SD below the stock’s 3-year forward average). We decide to favour PER valuations as we believe investors could be more reactive to the earnings results of the stock and its short term dividend prospects, as opposed to taking a longer-term view. At least for the near-term outlook, the stock still offers attractive average ROE of c.50% and yield of 9%.

Source: Kenanga Research - 26 Mar 2020