Upgrade to Add; 9% dividend yield
- Astro Malaysia has lost over RM860m in market cap since its 2QFY1/23 earnings release, sending its stock down 21.1% in just three weeks.
- While piracy has eaten into Astro’s earnings, the group’s financial position remains robust with FCF over twice its net profit.
- Our projections for CY22-23F dividend yields come to 9%, higher than most stocks under our universe of coverage. Upgrade Astro to Add from Hold.
Stock down nearly 20% since end-Sep 2022
Astro Malaysia’s stock is down 21.1% since its 2QFY1/23 results announcement on 26 Sep 2022. We did sound the alarm bells over piracy still prevailing despite Astro’s assiduous attempts to win over subscribers. However, we believe the sell-down over fears delivering weak earnings and dividends. Its 17 Oct 2022 closing price translates into a potential 34.4% upside to our target price and generates CY22-23F dividend yields of 9%.
Yields still attractive if Astro’s FY1/24-25F earnings fall short
While Astro used to pay out all – or more – of its annual reported net profit as dividends, the payout has now been reduced to at least 75% of its reported net profit which we believe is still generous. Astro’s business model of collecting monthly subscription fees leads to strong cashflows, with its historical FCF easily more than double its annual reported net profit. Therefore, its dividend payout made up only 31.8-53.6% of its FCF during FY1/18- 22, and we expect it to be 49.5-60.8% in FY1/23-25F. The group has repeated its stance that it has no plans to revise its dividend payout policy after the one-off reduction in payout in FY1/20, which was done to beef up its cash reserves ahead of the uncertainties brought about by the Covid-19 pandemic. We project Astro’s subscription revenue to be flat in FY1/24F, and fall 2.5% yoy in FY1/25F. Even in the extreme case of Astro’s FY1/24-25F EPS falling 30% short of our projections, the 80% payout we assume would still translate to CY23-24F dividend yields of 6.4% (based on 17 Oct 2022’s close of 65.5 sen) – which we still deem attractive amid high interest rates.
Upgrade to Add; DCF-based TP remains at 88 sen (WACC: 11.8%)
Astro is also not waving the white flag even with piracy becoming omnipresent. Its strategic shift to become a full-suite broadband connection and content provider could help restore its revenue in the long run, as its content proposition is still head-and-shoulders above its competition, in our view, predicated on its original content and exclusive agreements locked with major international producers and sports leagues. Astro is also one of our top ESG picks for the media sector because it is one of the few companies with no major shareholders linked to political parties. The 34.4% upside potential should be enticing for investors looking for capital appreciation, and they would get CY22-23F yields of 9% to boot. Downside risk: subscription revenue falling further than expected. Catalyst: new tentpole streaming services joining the Astro bandwagon.