Investment Highlights

• We are upgrading Astro Malaysia Holdings (Astro) from a HOLD to BUY with a higher fair value of RM3.10/share (previously RM2.90/share), derived from DCF with a discount rate of 8% and terminal growth rate of 2%. We have tweaked our FY18F-FY20F net profit forecasts by 1- 5% for housekeeping reasons.

• We came away from a company visit gaining more clarity on the company's direction and prospects. We believe Astro would see improvements in adex in FY19 due to two notable sporting events this year, namely the PyeongChang 2018 Winter Olympics and the 2018 FIFA World Cup. In our opinion, the events are far more enthralling compared to those of 2017, during which the SEA Games and Merdeka celebration were the only notable events.

• From our historical checks, Astro's TV adex grew 7% YoY and 39% QoQ during the quarter that the 2014 FIFA World Cup was held (2QFY15). Similarly, the group's radex expanded 9% YoY and 35% QoQ.

• Astro is expected to benefit from the strengthening MYR after its hedging contracts expire in 6-12 months' time. Currently, circa 70% of its content costs are denominated in USD, while receipts are based in MYR. We estimate that every 1% depreciation in USD/MYR would improve Astro's earnings by 1.5% assuming the absence of hedging.

• We believe the imminent ASO in June 2018 creates opportunities for the group to increase NJOI's household penetration. Besides a potential increase in NJOI revenue, higher household penetration also broadens the addressable market of Go Shop and bodes well for the group's pay-TV subscriber base as the upgrade process from freemium to premium service is seamless

• Astro has embarked on several digitalisation initiatives to improve operational efficiencies, including replacing call centre personnel with chatbots to attend basic customer queries and moving film storage from physical servers to cloud (Amazon Web Services). These initiatives are estimated to bring about cost savings of circa RM30mil in FY19F and RM40-50mil/year subsequently.

• Tribe’s user base has rapidly grown to 2.5 million registered users as of 3QFY18. While the contribution to the top line remains immaterial at this juncture, we are mindful that the group could raise its subscription fees in the future to improve ARPU. Leveraging the group's existing content library, Tribe could command handsome operating margins and generate meaningful contributions to the bottom line going forward.

Source: AmInvest Research - 5 Feb 2018