Astro Malaysia Holdings’ (ASTRO) FY24 results met expectations but trumped consensus.
Kenanga Investment Bank (Kenanga) Results Note today said earnings contraction was mainly due to the prevailing trends of TV subscriber churn and lower adex.
Moving forward, ARPUs may come under pressure from introduction of new plans with lower floor pricing.
Kenanga cuts their FY24F earnings by 5%, lowered their TP to RM0.27 (from RM0.33), and maintained their Underperform call.
Met expectations
Its FY24 core net profit of RM215.3m (-31% YoY) was within expectation but exceeded the consensus estimate by 18%.
Normalised FY24 PATAMI excludes the following:- (i) unrealised FX loss of RM99m due to mark-to-market revaluation of transponder lease liabilities, and (ii) impairment charge of RM74m (recognizsed in 4QFY23) on the IP and goodwill of a legacy media asset:
Unending churn cycle
Its FY24 revenue contracted by 8% YoY as ASTRO’s subscriber base shrunk to 5.34m (-3% YoY) due to persistent churn (YoY: -153k). To a lesser magnitude, topline contraction was amplified by lower TV adex (-19% YoY).
The greater decline in bottom line was due to: (i) increased opex, and (ii) lumpy costs of RM52m for severance payments and benefits to employees under its voluntary separation scheme (VSS) in August. This effectively countered lower content costs, which had previously spiked in FY23 due to the Qatar World Cup.
Some bright spots in ARPU
On a more encouraging note, ASTRO ended the year with higher ARPU of RM99.7 (4QFY23: RM98.20) following higher sales of bundled fibre offerings. Evidently, ASTRO’s broadband subscriber base grew by a commendable 21% YoY.
Additionally, adex recovered by 10% QoQ, driven by the radio segment, as advertising ramped up during Lunar New Year festivities.
Key takeaways from its analyst briefing are as follows:
1. ASTRO is optimistic that its new plans with ‘lower price floor’ of RM40-RM60 per month will be well received. Moreover, these affordable new products will enable ASTRO to expand its market reach and broaden its addressable advertising market. The introduction of these plans takes into account the recent decline in average disposable incomes among Malaysians.
2. In spite of the introduction of cheaper packages, ASTRO is confident that its ARPU will remain resilient. This is underpinned by expectations of improving sales traction for its broadband bundles.
3. Whilst it is still early days, ASTRO is encouraged by the promising uptake for Sooka as awareness ramps up that may provide tangible contribution to earnings in the future.
Pay-TV weighed by a barrage of challenges
ASTRO’s pay-TV is facing competitive headwinds on multiple fronts. Firstly, when it comes to provision of international programming, it is subject to intense competition from over-the-top (OTT) streaming platforms (e.g. Netflix, and Disney+ Hotstar).
Whereas within the local vernacular space, it is fighting for market share with domestic Free-to-Air television (FTA TV). Meanwhile, younger audiences are leaning towards social media, mobile apps, and websites for news and sports content. To top it off, the internet has enabled illicit activities such as: (i) unauthorised digital downloads of TV series and movies, and (ii) proliferation of illegal TV boxes.
Music streaming has superior AI edge
Kenanga anticipates future weakness in ASTRO’s adex, given the sustained decline of its TV viewership. Moreover, both advertisers and customers may increasingly favour digital music streaming platforms such as Spotify and Apple Music. The latter leverages on artificial intelligence (AI) to offer personalized content and targeted commercials. Hence, this enhances the overall customer experience, whilst ensuring effective advertising.
Reduced forecasts.
Kenanga cuts their FY25F earnings by 5% to reflect lower ARPU following the introduction of cheaper packages. In addition, Kenanga introduced their FY26F numbers and cut our terminal growth rate assumption to 0% (from 1%). This is to reflect the deteriorating outlook on long-term earnings.
As a result, Kenanga’s TP based on DCF is lowered by 19% to RM0.27 (from RM0.33). There is no adjustment based on a 3-star ESG rating as appraised by them.
Investment case
Kenanga remains cautious on ASTRO due to: (i) fierce competition from OTT streaming platforms and FTA TV, (ii) bloated cost base that includes legacy expenses (e.g. ongoing payment of transponder lease costs to MEASAT Satellite), and (iii) competition from digital music streaming platforms that leverage on AI to offer personalized content and targeted commercials.
Kenanga maintains Underperform
Risks to Kenanga’s call include: (i) cord-cutting trends ease as consumer discretionary spending rebounds, (ii) robust legal enforcement effectively eliminates the proliferation of illegal set top boxes, and (iii) recovery in consumer and business sentiment propels a broad-based recovery in adex.
