This article first appeared in The Edge Financial Daily, on March 24, 2016.

Astro Malaysia Holdings Bhd
(March 23, RM2.97)
Maintain add with a target price (TP) of RM3.36: The earnings before interest, taxes, depreciation and amortisation margin in the fourth quarter ended Jan 31, 2016  (4QFY16) grew by 1.5% quarter-on-quarter (q-o-q) from 34.5% to 36% due to an increase in pay-TV subscribers from 3.53 million to 3.55 million, lower content cost and interest expenses. Group core net profit rose by 92.2% q-o-q from RM106 million to RM204 million. It declared a total dividend of 3.75 sen in 4QFY16, bringing total FY16 dividend to 12 sen (versus 11 sen in FY15).

Revenue in FY16 grew by 4.7% from RM5.2 billion to RM5.5 billion due to higher sales from home shopping, advertising expenditure and subscription revenue following an increase in pay-TV subscribers. Overall, Astro’s net profit in FY16 rose 18.5% from RM519 million to RM615 million despite higher interest expenses and foreign-related content cost following the ringgit’s depreciation.

As at January 2016, it reached 67% of Malaysian TV households with over 3.6 million pay-TV subscribers. 

While its free satellite television service NJOI’s customers contributed lower average revenue per user (ARPU), they are a huge base of potentially 1.3 million customers who could eventually switch to the pay-TV platform. Management said 33,000 NJOI customers switched to the pay-TV platform in FY16.

Astro aspires to be an agnostic content provider in order to stay relevant and to capture the shift in content consumption from TV to the online platform. For example, Astro recently launched an online video service called “Tribe” in a bid to grow its customer reach beyond Malaysia, following its launch in Indonesia. Meanwhile, its “On Demand” service has attracted a decent 350,000 personal video recorder connections out of 900,000 households.

Management also guided for a 15% increase in foreign-based content cost in FY17 partly due to the ringgit’s depreciation and higher sporting content cost. The total content cost is expected to reach about RM1.9 billion or 37% of TV revenue in FY17. However, we expect its content cost to normalise to RM1.8 billion or 33% to 34% of TV revenue in FY18.

We maintain “add” with a slightly higher discounted cash flow-based TP of RM3.36 as we tweak our FY17 to FY18 earnings per share by 1%. Astro remains our sector top pick due to its defensive earnings and dominant market position with a 67% household penetration. Rising ARPU from value-added services and stronger home-shopping contributions are potential catalysts. — CIMB Research, March 23