ASTRO’s 1HFY25 results disappointed as costs remained high, while topline was dragged by persistent subscriber rout and weaker adex. We cut our FY25-26F earnings by 18% and 11%, respectively, lower our TP by 8% to RM0.23 (from RM0.25) and maintain our UNDERPERFORM call.

Underwhelmed expectations. Its 1HFY25 core net profit of RM51.7m disappointed, coming in at 38% and 44% of our full-year forecast and the full-year consensus estimate, respectively. The shortfall versus our forecast was mainly due to higher-than-expected overheads.

Weighed by weaker adex and subs churn.1HFY25 topline contraction (-8% YoY) was mainly attributed to protracted subscriber churn of 129k that led to customer base contraction (-2.4% YoY). Subscriber attrition prevailed despite the recent introduction of ASTRO’s affordable entrylevel plans starting at RM42 per month. In addition, to a lesser magnitude, revenue decline was exacerbated by weaker adex (-16% YoY) for payTV and radio.

1HFY25 core net profit halved YoY due to topline weakness and increased broadband and tax costs. This more than offset lower costs for content, marketing, manpower and amortization.

Slight ARPU uptick boosted by fiber bundling. The only bright spot was a slight uptick in sequential ARPU to RM99.8 (1QFY25: RM98.4). This was attributed to: (i) sustained traction in the popularity of its broadband bundles (subscribers: +11% YoY), and (ii) AstroFirst pay per view buys.

Key takeaways from its analyst briefing are as follows:

1. ASTRO plans to appeal against additional tax assessments totalling RM735m by the Inland Revenue Board (IRB). Since its inception, ASTRO has adopted the practice of recognizing its content as raw material that drives revenue generation. Hence, the group believes its production costs should be classified as tax deductibles. This aligns with practices followed by larger domestic and global media companies.
    
2. ASTRO typically hedges the majority of its USD-denominated costs 12 months in advance. This implies that the effects of a stronger MYR vs. USD will only be reflected after a 12-month lag. While the share of USD-denominated cost is not disclosed, the group's overall cost base has declined following the recent retirement of MEASAT's M3a satellite. This had resulted in a meaningful reduction to its transponder capacity utilization costs. Recall that ASTRO leases these transponders to provide direct-to-home and internet access services to its subscribers.
    
3. ASTRO’s advertising revenue continues to be affected by the ongoing consumer boycotts of international brands. This is given that the bulk of its advertising clients mainly comprise multinational corporations, instead of public sector clients. The Gaza conflict, which began in Oct 2023, has weakened the perception of several international brands in Malaysia. Consequently, these companies have cut their marketing budgets to partially offset declining revenues. On a positive note, ASTRO has observed that these boycotts are gradually easing, which alludes to the nascent recovery of adex.

Hefty additional tax assessments are a key risk. We are cautious of sustained topline weakness given unrelenting subscriber churn and limited ARPU upside. Furthermore, fixed costs remain elevated, as both legacy and new cost structures are running concurrently, according to ASTRO. Additionally, having implemented various cost-cutting initiatives in recent years, we see limited opportunities for further cost savings. In our view, the group has largely harvested low-hanging fruits earlier by optimizing costs for manpower and its customer relationship management platform. Furthermore, if ASTRO is unsuccessful in its appeal against IRB’s additional assessments, the impact would be hefty. In the worst case, this additional tax liability will erode ASTRO’s shareholders’ funds (as at end-Jul 2024) by 63% to RM430m. In addition, assuming full settlement via borrowings, ASTRO’s net debt and gearing of RM3.0b and 2.6x as at end-Jul 2024 will rise to RM3.7b and 8.6x, respectively.

Forecasts. We cut our FY25-26F earnings by 18% and 11%, respectively, to reflect higher broadband costs.

Valuations. Correspondingly, we lower our TP based on DCF by 8% to RM0.23 (from RM0.25). There is no adjustment based on a 3-star ESG rating as appraised by us (see page 4).

Investment case. We remain cautious on ASTRO due to: (i) intense competition from OTT streaming platforms (for international content) and FTA TV (for vernacular content), (ii) its inflated cost base that includes legacy expenses (e.g. ongoing payment of transponder lease costs to MEASAT Satellite), and (iii) competition from digital music streaming platforms that leverage on AI to offer curated content and targeted commercials. Maintain UNDERPERFORM.

Risks to our call include: (i) cord-cutting trends moderate as disposable incomes increase, (ii) effective legal enforcement eliminates the proliferation of illegal set top boxes, and (iii) rebound in consumer and business sentiment catalyzes a recovery in pay TV adex.

Source: Kenanga Research - 2 Oct 2024