A new Astro is an inevitability

■ Astro’s 9MFY1/22 core net profit made up only 59% of our FY1/22F forecast. Subscription revenue was below our expectation.
■ The group said the economic reopening should buoy 4QFY1/22F’s earnings. It remained optimistic that streaming integration should work in the long run.
■ We cut our FY1/22-24F EPS by 17-21%. The economic slowdown is putting a spanner in the works but we still believe in Astro’s transformation.

9MFY1/22 core net profit was underwhelming

Astro Malaysia’s 9MFY1/22 earnings fell short of our expectation. 9M core net profit (excluding RM8m in unrealised foreign exchange losses) made up 59% of our FY1/22F forecast, and 65% of consensus. Contribution from Disney+ Hotstar commenced for the full quarter in 3QFY1/22; thus, we thought its subscription revenue will rebound from 1HFY1/22 levels beginning in 3QFY1/22. Alas, 3QFY1/22 also coincided with the last lap of Malaysia’s movement control order. Revenue in 3QFY1/22 fell across all segments, with aggregate turnover falling by 7.6% yoy. This pulled down 9MFY1/22’s revenue by 3.3% yoy. With the Tokyo 2020 Summer Olympics and UEFA Euro 2020 piling on Astro’s content costs in 2Q-3QFY1/22, the group’s 9MFY1/22 core net profit sank by 12.9% yoy. Astro declared its third interim DPS of 1.5 sen, bringing the YTD amount to 4.5 sen. With one more interim and final dividends, we believe FY1/22F DPS could meet our revised forecast of 7 sen.

Cutting our assumptions for future subscriber revenue growth

We cut FY1/22-23F EPS by 17-21% on lower subscription revenue forecasts (from 3.2- 17.5% growth yoy to a 3% drop yoy in FY1/22F and 8.1% yoy growth in FY1/23F). We are still positive on Astro’s plan to bring in up to 15 third-party subscription-based video-on- demand (SVOD) services. We think Malaysians will see the value in the bundled proposition once Astro signs with the SVOD services, which it aims to complete by end-FY1/23F. However, we are cognisant that the unfavourable economic conditions could
slow down growth. One positive is that Astro does not expect the Cukai Makmur (“Prosperity Tax”) to heavily affect FY1/22F’s bottomline, since its taxable income can be offset by deferred tax assets of loss-making units.

DCF-based TP lowered to RM1.45 (WACC: 9.3%)

We stay Add on Astro. The group said it would not proceed with heavy investments in Internet-connected set-top boxes and negotiate tirelessly with SVOD service owners if it did not think these initiatives would help arrest its plummeting subscription revenue and popularity – and we concur. We recommend investors to accumulate the stock if there is further weakness, as we still believe the “new Astro” transformation strategy will take time to bear fruit. The stock offers CY21-22F yields of 7.5-7.9% – some of the highest among CGS-CIMB Research’s Malaysia coverage universe. Downside risks are high-income
cord-cutters sticking to piracy, and advertising sales remaining muted.