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Media reported that T. Ananda Krishnan, the single largest shareholder in Maxis Bhd and Astro, is believed to be looking at a corporate exercise involving the two entities to strengthen their position in the changing technology and media landscape. Sources said the lowprofile tycoon, who controls the companies through privately-owned Usaha Tegas Sdn Bhd, has been looking at how to position the group’s telecommunications and media business in line with increasing competition. “The global trend is for consolidation between the companies that provide connections to consumers and content providers. It is happening everywhere and Usaha Tegas is in the best position to capitalise on it,” said a source. (Source: The Star)

COMMENT:

• Taking cue from emerging markets…We note that this trend is seen in US where the US court gave the green-light for telco AT&T to take over Time Warner – a deal valued at US$80b (RM240b). The 21st Century Fox, which is owned by Rupert Murdoch, is another media entertainment company being eyed by two suitors.
• ….as a strong partnership can make financial sense. We do not completely rule out the potential takeover of Astro by Maxis or a merger of both entities given the strong, majority shareholder links. To recap, Ananda is the single largest shareholder in Astro with a 40% stake. He has a 62.42% holding in Maxis. Astro and Maxis have market capitalisation of RM8.3b and RM44.2b respectively. Importantly, we believe the value inherent in the potential tie-up centres on the synergy that can arise given that both Maxis and Astro can benefit from content cost optimisation as a single entity. Additionally, the merged entities will also pave the way for cost optimisation in marketing, staff and overhead costs. Maxis spends 2% of revenue on marketing expenses on a yearly basis and an additional 7% on staff cost.
• Maintain HOLD on Maxis with a DCF-based target price of RM6.40. Our call reflects lofty valuations and pedestrian earnings. At our target price, the stock trades at 25x 2018F PE and 12x EV/EBITDA. We think a good entry level is RM5.40.
• We reiterate our BUY call on Astro with a target price of RM2.21, based on a -0.5% earnings CAGR in our DCF model, implying 17x FY19F PE and 7.4x EV/EBITDA. Astro’s household penetration rate stood at 75% as at 4QFY18 with 12,000-13,000 hours of library content. Astro is constantly adding more hours (primarily vernacular content) to its library, indirectly benefitting its over-the-top (OTT) platforms such as NJOI, Tribe and Astro Go, to drive subscriber growth. While it may face challenges in the near term to significantly monetise such services which command lower ARPUs, serious cord-cutting should be farfetched, given that Malaysians spend about 77% of their daily TV viewing on Astro’s local content. Hence, we are not overly concerned and opine that the street is underestimating the potential of Astro’s strong library content and 75% household penetration rate.

Source: UOB Kay Hian Research - 20 Jun 2018