Headwinds emerging
Astro Malaysia’s 1HFY1/23 core net profit made up only 47% of our full-year forecast. We expect it to regress hoh with the World Cup rights raising costs.
One year after Astro introduced its streaming integration strategy, Malaysians are still not taking the bait, no thanks to the prevalence of piracy in Malaysia.
We thus expect Astro’s subscription revenue to continue to slide, cutting our FY1/23-25F EPS by 15-39%. We downgrade our call on Astro to a Hold.
1HFY1/23 earnings below expectations
Astro Malaysia’s 1HFY1/23 core net profit tumbled 10.4% yoy. While all segments underperformed yoy, what we find to be most alarming is the continued slide of its cash cow, i.e. subscription revenue; in 1HFY1/23, Astro’s subscription revenue eased 6.7% yoy, resulting in the group recording two straight quarters of turnover below RM1bn (4QFY1/22: RM1.03bn). Astro’s 1HFY1/23 core net profit was equivalent to 47% of consensus and our full-year forecasts. We deem this below consensus and our expectations, as we are expecting a weaker 2HFY1/23F. In our view, the costs incurred to obtain the rights to air and stream the 2022 FIFA World Cup will choke Astro’s margins, with FY1/23F pre-tax margin forecast at 13.4% vs. FY1/22’s 14.1%.
A tough battle of perception to revive subscription revenue
We had hoped the introduction of mainstream streaming services into Astro’s pay television service would help reinvigorate Malaysians’ interest in the latter. While we had expected that it would take time to bring Malaysians back onto the Astro bandwagon en masse, at the least we had hoped to see some recovery in the group’s subscription revenue from FY1/23F. However, in Jul 2022, ARPU remained flat yoy at RM97.40 despite the higher subscription prices from bundling Netflix and Disney+ Hotstar. From our observation, Malaysians have not been enticed as they are already comfortable using pirated streaming services or virtual private networks (VPN) to stream video services overseas. We are concerned that the persisting piracy poses a threat to Astro’s subscription revenue rebound.
Downgrade to Hold
In our view, Astro is a victim of the lack of enforcement against piracy in Malaysia. Indonesia is an exemplary case study of viewers in a developing country turning back to licenced video services when piracy is blocked; according to an Apr 2022 statement by the Asia Video Industry Association (AVIA), traffic to all pirate sites in Indonesia was down by 75% after the government blocked 3,500 sites. Our Hold call is supported by 7.2-8.5% CY22-23F dividend yields. Our lower 88 sen DCF-based TP is the result of: i) cutting our FY1/23-25F EPS by 15-39% on lower subscription revenue; and ii) raising the cost of debt in our WACC assumption from 2% to 5.5% to reflect the higher interest rates. Downside risks: the ringgit and subscription revenue regressing further than expected. Upside risks: subscriber revenue rebounds.
