ASTRO’s 9MFY24 results missed expectations due to prevailing drag from subscriber churn. Excluding one-off VSS costs, EBITDA margin shrunk to 41% (9MFY23: 45%) as it grappled with legacy costs. We slashed our FY24F and FY25F earnings by 26% and 12%, respectively, lower our TP to RM0.33 (from RM0.56), and downgrade our call to UNDERPERFORM (from MARKET PERFORM).

Grossly below expectations. Its 9MFY24 core net profit of RM135m came in at 49% and 57% of our full-year forecast and the full-year consensus estimate, respectively. The discrepancy versus our forecast was mainly due to weak TV subscription revenues and higher-than-expected overheads.

No end in sight for subscriber base erosion. Its 9MFY24 topline contracted by 5% due to sustained customer attrition (YTD: 136k) which led to subscriber base erosion (-2.5% YTD). To a smaller extent, the decrease in revenue was exacerbated by: (i) lower radio adex (radex) due to weakness within the broader industry, and (ii) lower box-office receipts due to reduced foot fall at nationwide malls in 3QFY24.

The larger dip in bottomline was (-58%) was attributed to: (i) higher overheads, and (ii) chunky costs of RM52m recognized for its voluntary separation scheme (VSS) for severance payments and benefits under this program that was undertaken in August.

Excluding the one-off VSS costs, EBITDA margin shrunk to 41% (9MFY23: 45%) as the group grappled with legacy costs (e.g. payment of transponder lease costs to MEASAT Satellite Systems Sdn Bhd) amidst fresh costs to implement its transformation program.

But ARPUs continue to surge. On a brighter note, pay TV ARPU sustained its sequential uptick to reach a high of RM99.8 (2QFY24: RM99.1, 3QFY24: RM97.4). This was following higher take-up of its bundled fiber offerings, as evident from the 22% YoY expansion in ASTRO’s broadband subscriber base.

Additionally, TV adex jumped 13% QoQ on the back of compelling original vernacular content under ASTRO’s signature programs (e.g. All Stars Gegar Vaganza, Family Feud, Mega Spontan, Big Stage).

Key takeaways from its analyst briefing are as follows:

1. ASTRO ceased operations of its home shopping business, Go Shop, in October. This was aligned with the group’s strategy to emphasize cost discipline and focus on its core businesses (i.e. pay TV and radio broadcasting).

2. The majority of staff that opted for ASTRO’s VSS program originated from the corporate services division. Hence, following their exit in January 2024, ASTRO’s headcount will be reduced by c.20%. Moving forward, ASTRO expects the financial payback from this exercise to materialize over the next 12 months. Additionally, in the near future, ASTRO does not expect to conduct any new VSS programs.

Pay TV faces multiple headwinds. We believe that market share erosion for Pay-TV will prevail due to structural cord cutting trends on the back of stiff competition from: (i) unauthorized TV boxes, and (ii) over-the-top (OTT) platforms (e.g. Netflix, Disney+ Hotstar). In particular, the leading OTT provider, Netflix, is ramping up its vernacular programming in major Asian languages (including Malay, Tamil, Mandarin). Furthermore, younger audiences are leaning towards new digital platforms (i.e. social media, mobile apps, websites, and video streaming) for news and entertainment content. Lastly, another nail on the coffin is continued unauthorized digital downloads of TV series and movies over the internet.

Traditional radio lacks AI edge. In terms of TV adex, we expect it to decline in tandem with Pay TV’s subscriber rout. Whereas for the radio segment, we expect its share of adex to continue to shrink given the growing popularity of OTT audio streaming apps such as Spotify and Apple Music. A key advantage of these apps over traditional radio is the application of artificial intelligence (AI) features. This enables personalized commercials and curated content that corresponds to user input. Therefore, this enhances customers’ experience whilst enabling targeted advertising.

Cut forecasts. We slashed our FY24F and FY25F earnings by 26% and 12%, respectively, to reflect subscriber churn and higher overhead costs. Additionally, we also removed contribution from the home shopping segment in-line with its cessation. As a result of this, our TP (DCF; TG: 1%) is revised to RM0.33 (from RM0.56).There is no adjustment based on a 3-star ESG rating as appraised by us (see page 4).

We downgrade ASTRO to UNDERPERFORM (from MARKET PERFORM) as we expect sustained earnings weakness against the gloomy backdrop highlighted above. Correspondingly, we expect this to translate to lower dividends in line with the group’s revised policy that aims to reinvest in the growth of adjacent businesses, whilst preserving liquidity.

Risks to our call include: (i) cord-cutting trends ease as consumer discretionary spending rebounds, (ii) effective legal enforcement eradicates the proliferation of illegal set top boxes, and (iii) recovery in consumer and business sentiment propels a sector-wide recovery in adex.

Source: Kenanga Research - 15 Dec 2023