Astro’s core net profit declined 47% qoq and 72% yoy in 2QFY25, and 71% for 1HFY25. The 1H core net profit made up only 22-26% of CGS’ and Bloomberg consensus FY25 Forecasts, while this may bleak, the group did see a healthier profit for the quarter.
According to CGS, the weaker profits were caused by higher sports content costs incurred (for UEFA Euro 2024, Olympics, Copa America), persistently weak advertising revenues (adex) as boycotts amid the Middle-East conflicts continue to weigh on ad spend by MNCs, and 3) higher taxes. The cost savings CGS said it was expecting are taking longer than expected to filter through as it steps up customer acquisition efforts.
However, encouragingly, average monthly revenue per user (ARPU) rose to RM99.80 in 2Q (+RM0.70 yoy, +RM0.40 qoq), driven by its active bundling and upselling strategies. Astro will be rolling out three new packages over the next few months with an improved content offering to cater to changing consumer preferences and to simplify package choice considerations.
Taking into consideration the recent developments, CGS has cut its FY25F/FY26F/FY27F core net profit forecasts by 48%/40%/21% to factor in weaker adex as well as higher opex (on slower-than-expected realisation of cost benefits from the group’s right sizing efforts as Astro channels these savings into growing its customer base over the next 2-3 years) and taxes, albeit partially offset by lower RM/US$ assumption of RM4.60/RM4.50/RM4.10. Following the earnings revisions, DCF-based TP drops to RM0.41 (WACC: 9.7%, LTG: 1%).
Tailwinds from a strengthening ringgit
All of Astro’s revenues are denominated in ringgit, while we estimate that about 35% of its total costs are in US$, comprising mainly a portion of its content cost, transponder leases and software related expenses. As such, the house says the company stands to benefit from the recent ringgit strength, albeit at a lag given that it hedges the bulk of its US$-related costs on a 12-month rolling basis.
Reiterate Add with a lower DCF-based TP of RM0.41
While headwinds persist given the downtrend in its Pay-TV subscriber base, CGS has retained its Add call as the house believes its efforts to innovate, offering services with better value propositions and cost optimisation, are slowing starting to bear fruit.
At current price, Astro trades at an adjusted FY25F EV/EBITDA of 3.2x, a 48% discount to its 10-year mean of 6.2x, with FCF yields of over 13%, based on our estimates, potentially leading to the reinstatement of dividend payments (its last declared dividend was in 2QFY24). Downside risks: ARPU deterioration and reversal in current ringgit strength. Re-rating catalysts: reinstatement of dividend payment policy, and sustained strength in ARPUs and margin expansion.
