ASTRO All Asia Networks- 1HFY10 results underwhelm (Company Update)

Price: RM3.65
Target Price: RM3.65
Recommendation: HOLD


· Below expectations. ASTRO All Asia Networks (ASTRO) registered 1HFY10 net profit of RM62.3m, accounting for 32% of our FY10 estimate and 30% of street forecast. This was primarily due to higher content costs and loss by associates. A second interim dividend per share of 2.5 sen tax-exempt was declared.

· Weak consumer sentiment still evident in 1H with lower net additions (down 32% to 135,000) and ARPU (down by 6% to RM79). 1HFY10 revenue rose a slight 4% YoY to RM1,515.6m due to higher sales contribution from MC-TV and TV programming divisions. However, EBITDA margin contracted by 1% as higher content and operating costs coupled with lower advertising and other income offset higher revenue and lower overhead and administrative costs. Having removed the RM11.1m provision for termination of Indonesian services (that is significantly lower than the RM376.8m provision in 1HFY09), 1HFY10 core net profit was 42% lower due to higher loss incurred by its Indian associate and higher taxation.

· Higher subscription and advertising revenue locally but loss from Sun grows. Revenue in 2QFY10 remained stable with small 2% uptick QoQ from growth in MC-TV subscriptions and higher airtime sales in the TV and Radio segments. 2QFY10 EBITDA was 8% higher QoQ largely because higher advertising income and subscription revenue, as well as lower content costs outweighed higher cost of sales and other operating expenses. Net profit excluding EI declined 11% QoQ due to greater associate’s loss and corresponding higher tax rate.

· HD-TV roll-out in FY10 as ASTRO seeks to retain viewer interest and market leadership. Cost of investment for the broadcast of HD-TV is pegged at RM450m in FY10 and RM350m in FY11.

· Earnings forecasts in FY10 and FY11 unchanged. We anticipate stronger 2HFY10, with earnings in 3QFY10 boosted by the RM12 sports package price increase and English Premier League, both of which take effect in August 2009. Our assumption of FY10 monthly ARPU of RM80, content cost at 36% of revenue and EBITDA margin of 22% is in-line with management guidance.

· Downgrade to Hold from Trading Buy as the stock has reached our target price of RM3.65 based on DCF valuation utilising WACC of 10% and terminal growth rate of 4%. While 2HFY10 is expected to post stronger earnings, we believe that the launch of HD-TV and foreign associate will put a drain on company resources. We believe that the stock is fully-valued at 37x PER.