Investment Highlights

• We are downgrading Astro Malaysia Holdings (Astro) from a BUY to a HOLD with a lower fair value of RM1.81/share (previously RM2.12/share) based on a discount rate equivalent to its WACC of 9% and a terminal growth rate of 0%. We have cut FY19F-FY21F earnings by 20-29% amid continued pressure on the pay-TV industry due to content piracy and illegal TV settop boxes and an increasingly competitive landscape for its over-the-top (OTT) offerings.

• Key highlights from our recent meeting with the company are as follows:

1. Stronger vernacular and local content creation: Astro’s joint venture (JV) with Karangkraf Digital 360 (KK360), known as Nu Ideaktif, aims to produce a strong line-up of local and Nusantara intellectual properties (IPs) i.e. content from producers and writers from Southeast Asia, with regional appeal by leveraging Karangkraf’s strong presence amongst the Malay-speaking community. The JV is expected to generate new revenue across Astro’s multiple platforms such as TV, over-the-top (OTT) and digital, and support the expansion of its regional OTT, Tribe.

2. NJOI to drive TV household penetration: Moving forward, NJOI, Astro’s subscription-free satellite TV service, is expected to be the primary driver for household penetration. The growth in NJOI’s base will also broaden the reach of the company’s commerce arm, Go Shop, and bodes well for its pay-TV base as it provides an upsell pathway to its pay-TV platform.

3. Events expected to boost FY19 viewership and adex:

a) FIFA World Cup 2018 – Astro had the broadcast rights to all 64 of the scheduled matches, live and in HD on all screens. The group also offered the World Cup Channel Pass to non-Astro subscribers via Astro GO;

b) GE14 – Record-breaking TV viewership on Astro Awani with 1.4mil and 9.2mil unique TV viewers on 9 May and 10 May respectively from its round-the-clock coverage of the election. The group intends to increase viewer “stickiness” from its curated content such as that from Astro Awani;

c) 2018/19 English Premier League (EPL) – The group expects to broadcast the EPL in Ultra HD in October. In total, Astro plans to launch 4 Ultra HD channels for live sports and general entertainment.

4. Potential upside to analogue switch-off (ASO): Although the ASO is being delayed to 1QCY19, we believe it may create opportunities for Astro to increase NJOI’s household penetration as it offers the highest number of free TV and radio channels when compared against MYTV and Unifi TV (Exhibit 1).

5. Plans to replicate its household reach onto the individual space: Astro plans to further enhance customer experience via its analytics-driven approach, in order to improve “discovery of content” via personalized UI/UX interface for each household member and content portability for seamless viewing across personal devices.

• Despite these developments, we remain cautious on Astro due to the following key risks:

1. Higher content costs for the year despite stronger ringgit: Astro’s content costs make up 29-32% of the group’s total revenue and 70% of these are international/sports programmes which are USD-denominated. Therefore, the group is a net beneficiary of a strengthening MYR. The ringgit strengthened against the US dollar by 9% YoY from 4.3598 in 1HFY18 to 3.9536 in 1HFY19. However, content costs are higher for years with major sports events at around 36-37% of TV revenue vs 32-34% in non-sports years.

2. Persisting competition from OTT, iPTV and illegal TVs: The group could face intensifying competition as high-speed internet improvements boost content streaming and could increase the demand for popular OTT alternatives such as Netflix and HBO Now. However, we note that high-speed internet remains underpenetrated in rural areas, which could momentarily shelter churn in Astro’s pay-TV subscriptions and provide it with a window for business transformation.

3. Ability of its commerce, OTT offerings and digital initiatives to offset the decline in its subscription earnings: Astro’s Pay-TV subscription commands 76-80% of the group’s total revenue and has been on a declining trend due to a shift in consumers’ preferences from traditional pay-TV media towards streaming content. Although we commend its progress in NJOI, Go Shop as well as its digital initiatives, we believe that the weaker subscription earnings will continue to pose a drag on the group’s profitability, unless it manages to leverage on its dominance in household penetration and provide personalized and differentiated content to engage consumers across different platforms.

Source: AmInvest Research - 10 Aug 2018