Astro Malaysia Holdings Bhd
(Sept 17, RM3.08)
Upgrade to buy with a higher target price (TP) of RM3.58: Astro Malaysia Holdings Bhd reported second-quarter financial year ending 2016 (2QFY16) earnings of RM137.3 million, a slight decline of 0.4% year-on-year (y-o-y). The decline was mainly attributable to an increase in net finance cost in view of the discounting of transponder’s deposit to its present value. However, after adjusting for unrealised foreign exchange (forex) losses of RM9.2 million, 2QFY16 normalised earnings improved by 6.3% y-o-y to RM146.5 million. This resulted in earnings before interest, taxes, depreciation and amortisation (Ebitda) margin expansion to 42% from 39.5% in 2QFY15.

For the first half of FY16 (1HFY16), the group’s reported earnings grew 14.8% y-o-y to RM305.6 million from RM266.1 million in the previous corresponding period. After excluding the unrealised forex losses incurred in 2QFY16, normalised earnings came in 18.3% higher y-o-y to RM314.8 million. The increase in 1HFY16 earnings was supported by a 3.7% y-o-y improvement in top-line contribution and healthier Ebitda margin. Normalised earnings came in within our and consensus expectations, accounting for 53.5% and 48.7% of FY16 full-year earnings estimates respectively.

Astro’s 1HFY16 revenue increased 3.7% y-o-y to RM2.7 billion. The boost in 1HFY16 revenue was supported by a higher household penetration of 65% from 60% as at 1HFY15. Note that as at 1HFY16, Astro’s customer base ballooned to 4.6 million customers from 4.2 million as at 1HFY15. Furthermore, average revenue per user also rose to RM99.1 from RM98 respectively.

The company was more prudent in its capital spending throughout 1HFY16. For the period, capital expenditure (capex) was reduced by 4.8% y-o-y to RM118 million from RM124 million in 1HFY15. For FY16, the bulk of the capex will be allocated for product and service upgrade, customer relationship management system enhancement and Measat-3b platform.

The group declared a dividend of 2.75 sen per share in 2QFY16. Coupled with the 2.75 sen of dividend declared in 1QFY16, 1HFY16 dividend declared amounted to 5.5 sen per share. This is in line with our full-year FY16 dividend payout assumption of 11 sen per share.

While we are maintaining our revenue forecasts for FY16 and FY17, we are factoring in higher Ebitda margins for FY16 and FY17 in view of the effective cost management strategies. As a result, our FY16 and FY17 earnings are revised higher by 5.8% and 6.8% respectively. Despite our upward revision in earnings, we are leaving our FY16 dividend assumption unchanged. We are only revising FY17 dividend assumption higher to 12 sen per share from 11 sen per share previously.

In line with the higher earnings assumption, we are revising upwards Astro’s TP to RM3.58 per share from RM3.33 per share previously. This is premised on FY17 earnings per share of 12.8 sen against forward price-earnings ratio (PER) of 28 times. Our PER assumption is based on the historical average low PER since its listing.

Despite various headwinds affecting the media industry, the group continues to outperform by successfully expanding its customer base through dual-model — the premium and freemium market approach. On the other hand, its continuous cost management strategy has also kept the operating cost at bay. As a result, the business has a strong cash generation capability which enables the adoption of a progressive dividend policy.

Due to the current weakness in share price, the stock now offers an attractive dividend yield of approximately 4%. All factors considered, we are upgrading the stock recommendation to “buy” from “hold” previously. — MIDF Research, Sept 17

This article first appeared in digitaledge Daily, on September 18, 2015.