Results Review Malaysia 5 December 2019 Communications | Media Astro Malaysia (ASTRO MK) Buy (Maintained) Christmas Comes Early Target Price (Return) MYR1.93 (+42%) Price: MYR(+18%)1.36 Market Cap: USD1,696.2m Avg Daily Turnover (MYR/USD) 3.6m/0.9m Maintain BUY, higher DCF-based TP (WACC: 8.7%) of MYR1.93 from Analyst MYR1.85, 42% upside plus 6% dividend yield. Astro’s 9MFY20 results trumped our/consensus expectations on larger-than-expected opex Jeffrey Tan efficiencies. We lift FY20, FY21 and FY22F core earnings by 14%, 5.2%, +603 9280 8863 6.2% after factoring in stronger opex gains, and roll over our forecast base [email protected] year to FY21. We continue to like Astro for its positive commercial execution, strong cash generation and attractive dividend yields. Downside risks are weaker-than-expected earnings and margins. Earnings beat. 3QFY20 and 9MFY20 core earnings surprised on the upside, at 86% of our forecast (consensus: 79%). 3QFY20 core earnings improved 6% QoQ (-0.1% YoY) despite continuing revenue pressure (-2% QoQ, -12.2% YoY). The key variance was larger-than-expected opex savings and Share Performance (%) lower content cost. This fuelled the 2-ppt QoQ rise in EBITDA margin to 38% YTD 1m 3m 6m 12m (9MFY20: 36.3%). An inline 2 sen quarterly DPS brings YTD DPS to Absolute 4.6 (2.9) 2.3 0.7 7.1 6 sen/share, reflecting a payout of 60%. Relative 12.8 0.3 5.2 6.3 15.5 TV revenue down for the fifth consecutive quarter (-3% QoQ, -14% YoY) 52-wk Price low/high (MYR) 1.24-1.70 as pressure on subscription revenue persisted. This was partially offset by higher advertising sales (+3% YoY), with TV and radio advertising expenses (adex) outperforming broader industry adex. The key operating metrics (ARPU, TV households) were fairly stable, which demonstrate the resilience of its TV business despite the over-the-top (OTT) incursion and weaker consumer sentiment. Subs base was steady QoQ, with the Astro NJOI base offsetting the decline in premium TV subs. GO Shop revenue rose 3% QoQ (-5.2% YoY). Content cost should remain under control in FY21. Despite FY21 being a sporting year (UEFA Euro 2020 and the Olympics), management does not expect a bump up in overall content cost (managed at 30-35% of pay-TV revenue, or MYR1.5-1.6bn). Content cost fell 9.1% QoQ (9MFY20: -20%), with ongoing negotiations with content providers. Consequently, content cost/sales narrowed to 32% during the quarter. Source: Bloomberg Ultra-high definition (UHD) take-up topped 10k less than three weeks after the next generation UHD box was introduced. The UHD box acts as a retention strategy, with eligible subs (ARPU of MYR100 and above) re- contracted for 24 months. Management estimates 0.5m homes with 4K TVs in the country, of which 70% are Astro subs. This implies a potential addressable market of c.0.3m households. We see a progressive rise in the take-up of the UHD box on the back of greater affordability of 4K TVs and more UHD content being made available. ARPU uplift would come from downloads on on-demand titles (>50,000) and monetisation of cloud storage (beyond the 200 hours of complementary hours provided). The UHD box should also mitigate the threat from TV boxes. Forecasts and Valuation Jan-18 Jan-19 Jan- 20F Jan-21F Jan-22F Total turnover (MYRm) 5,531 5,479 5,451 5,589 5,642 Recurring net profit (MYRm) 678 562 701 734 745 Recurring net profit growth 4.6 (17.1) 24.7 4.8 1.4 Recurring(%) P/E (x) 9.2 15.3 10.1 9.7 9.5 P/BV (x) 10.9 10.4 7.4 5.6 4.5 P/CF (x) 3.5 3.7 4.5 4.2 4.3 Dividend yield (%) 9.2 6.6 5.9 6.2 6.3 EV/EBITDA (x) 5.9 6.5 5.7 5.4 5.3 ROE (%) 9.9 9.0 9.5 9.0 8.0 Net debt to equity (%) 571.2 484.2 309.1 207.2 162.6 Interest coverage (x) 4.8 2.9 3.7 3.5 3.2 So urce: Company data, RHB See important disclosures at the end of this report 1 Market Dateline / PP 19489/05/2019 (035080) Malaysia Results Review Financial Exhibits Asia Financial summary Jan-18 Jan-19 Jan- 20F Jan-21F Jan-22F Malaysia Recurring EPS (MYR) 0.15 0.09 0.13 0.14 0.14 Media DPS (MYR) 0.12 0.09 0.08 0.08 0.09 Astro Malaysia BVPS (MYR) 0.13 0.13 0.18 0.24 0.30 ASTRO MK ROE (%) 103.72 82.77 72.70 58.24 47.68 BUY Valuation basis Valuation metrics Jan-18 Jan-19 Jan- 20F Jan-21F Jan-22F DCF (WACC: 8.7%, TG: 1%) Recurring P/E (x) 9.2 15.3 10.1 9.7 9.5 P/B (x) - - - - - FCF Yield (%) 19.2 18.2 13.3 14.5 10.5 Key drivers Dividend yield (%) 9.2 6.6 5.9 6.2 6.3 i. Higher take of NJOI base; EV/EBITDA (x) 5.9 6.5 5.7 5.4 5.3 ii. Opex efficiencies; iii. Subscriber growth. EV/EBIT (x) 9.5 11.1 8.6 7.6 7.1 Income statement (MYRm) Jan-18 Jan-19 Jan- 20F Jan-21F Jan-22F Key risks Total turnover 5531 5479 5451 5589 5642 i. OTT cannibalisation Gross profit 2,261 1,945 2,298 2,335 2,410 ii. Piracy and proliferation of TV boxes. EBITDA (adj.) 1,820 1,605 1,756 1,809 1,826 Depreciation & amortisation (680) (673) (589) (526) (477) Operating profit 1,140 932 1,167 1,283 1,348 Company Profile Net interest (65) (279) (248) (320) (372) Astro is Malaysia’s leading satellite pay-TV Pre-tax profit 1,073 651 918 962 976 operator with a commanding share of pay-TV households Taxation (309) (190) (220) (231) (234) Net profit 771 463 701 734 745 Recurring net profit 678 562 701 734 745 Cash flow (MYRm) Jan-18 Jan-19 Jan- 20F Jan-21F Jan-22F Change in working capital (29) 9 (80) (20) 3 Cash flow from operations 2,016 1,895 1,583 1,667 1,638 Capex (656) (603) (640) (639) (897) Cash flow from investing activities (977) (239) (636) (636) (893) Dividends paid (651) (574) (596) (624) (633) Cash flow from financing activities (1,078) (1,639) (14) (348) (59) Cash at beginning of period 263 234 283 1,217 1,900 Net change in cash (39) 17 933 683 686 Ending balance cash 234 240 1,217 1,900 2,586 Balance sheet (MYRm) Jan-18 Jan-19 Jan- 20F Jan-21F Jan-22F Total cash and equivalents 234 283 1,217 1,900 2,586 Tangible fixed assets 2,768 2,626 2,456 2,336 2,518 Total investments 7 6 6 6 6 Total assets 6,848 6,260 7,189 7,801 8,730 Short-term debt 646 475 475 475 475 Total long-term debt 3,319 3,096 3,896 4,396 5,196 Total liabilities 6,195 5,581 6,400 6,899 7,713 Total equity 653 679 789 902 1,017 Total liabilities & equity 6,848 6,260 7,189 7,801 8,730 Key metrics Jan-18 Jan-19 Jan- 20F Jan-21F Jan-22F Revenue growth (%) (1.5) (0.9) (0.5) 2.5 0.9 Recurrent EPS growth (%) 23.6 (39.9) 51.4 4.8 1.4 Gross margin (%) 40.9 35.5 42.2 41.8 42.7 Operating EBITDA margin (%) 32.9 29.3 32.2 32.4 32.4 Net profit margin (%) 13.9 8.4 12.9 13.1 13.2 Capex/sales (%) 11.9 11.0 11.7 11.4 15.9 Interest cover (x) 4.8 2.9 3.7 3.5 3.2 Source: Company data, RHB See important disclosures at the end of this report 2 Market Dateline / PP 19489/05/2019 (035080) Astro Malaysia Malaysia Results Review 5 December 2019 Communications | Media Results At a Glance Figure 1: Results review table FYE Jan 3QFY19 2QFY20 3QFY20 QoQ (%) YoY (%) 9MFY19 9MFY20 YoY (%) Comments (MYRm) Lower TV subscription revenue, Revenue 1,383.8 1,236.4 1,215.4 (1.7) (12.2) 4,111.2 3,686.2 (10.3) partially mitigated by stronger adex and home shopping revenue Opex efficiencies and lower content EBITDA 472.7 437.6 457.0 4.4 (3.3) 1,222.6 1,338.0 9.4 cost QoQ EBITDA margin 34.2 35.4 37.6 29.7 36.3 (%) Depreciation & 165.0 169.0 166.0 (1.8) 0.6 494.0 494.0 0.0 Amortisation EBIT 307.7 268.6 291.0 8.3 (5.4) 728.6 844.0 15.8 EBIT margin (%) 22.2 21.7 23.9 17.7 22.9 Interest expense (102.2) (56.2) (80.6) 43.4 (21.1) (282.6) (201.7) (28.6) Interest Income 10.5 8.2 8.8 7.3 (16.2) 33.2 23.7 (28.6) Associates (0.3) 0.1 0.1 0.0 (133.3) 0.6 0.3 (50.0) Exceptional 0.0 0.0 0.0 - - 12.9 0.0 (100.0) items Pretax profit 215.7 220.7 219.3 (0.6) 1.7 479.8 666.3 38.9 Pretax margin 15.6 17.8 18.0 11.7 18.1 (%) Tax (62.1) (52.9) (49.8) (5.9) (19.8) (137.6) (159.9) 16.2 Effective tax rate (28.8) (24.0) (22.7) (28.7) (24.0) (%) Minority interest (0.4) 1.5 1.1 (26.7) (375.0) 2.3 9.5 313.0 Net profit 153.2 169.3 170.6 0.8 11.4 344.5 515.9 49.8 Core profit 178.2 168.3 178.0 5.8 (0.1) 403.5 530.3 31.4 Above our/consensus estimates Net margin (%) 12.9 13.6 14.6 9.8 14.4 Source: Company data See important disclosures at the end of this report 3 Market Dateline / PP 19489/05/2019 (035080) Astro Malaysia Malaysia Results Review 5 December 2019 Communications | Media Figure 2: DCF valuation FYE Jan FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30 EBITDA 1,808.6 1,825.5 1,845.1 1,834.8 1,824.1 1,813.0 1,801.4 1,789.3 1,776.7 1,763.7 Less: Cash tax (230.8) (234.1) (233.4) (229.5) (228.0) (223.2) (218.5) (217.2) (213.3) (210.4) Working capital (20.1) 2.8 9.7 25.6 12.3 23.3 20.9 15.6 20.1 19.0 Capex (450.0) (450.0) (450.0) (450.0) (450.0) (450.0) (450.0) (450.0) (450.0) (450.0) FCFF 1,107.7 1,144.2 1,171.4 1,180.9 1,158.4 1,163.0 1,153.8 1,137.7 1,133.6 1,122.3 Discount rate 0.92 0.85 0.78 0.72 0.66 0.60 0.56 0.51 0.47 0.43 PV of FCFF 1,018.6 967.5 910.8 844.4 761.6 703.2 641.5 581.7 532.9 485.2 Risk free rate 3.4% Beta 1.1 Equity risk premium 8.5% Cost of equity 12.8% Cost of debt 8% Tax rate 24% Terminal growth rate 0.5% WACC 8.7% NPV of cash flows 7,429.6 NPV of terminal value 5,811.7 Enterprise value 13,241.3 Add: Cash 1,216.6 Less: Debt (4,370.7) Equity value 10,087.3 No.