Highlights/ Comments

We returned from Astro’s company visit more confident about the expected strong earnings growth ahead.

Slower Adex growth..? The MH370 case has had some negative impact on Adex of all Media companies. Hence, we expect Astro’s YoY Adex growth for 1QFY01/15 to be slightly slower (1QFY01/14: 30%), albeit the impact is temporary.

Target ARPU… For FY01/15, management is targeting ARPU growth of 4% to RM100/month (vs. our forecast: RM98.4/month +2.5% YoY) contributed by higher revenue from B.yond subscribers and higher take-up rate of NJOI. Management is targeting to double up Adex for NJOI, with penetration increasing to 20% by FY19/FY20.

Lower capex… As we do not expect major surge in capex in the near future, this will lead to a higher FCF position, (estimated FCF yield of ~4.3% in FY15 vs. FY14: 2.5%), which could translate to a higher dividend yield.

Higher costs but… World Cup 2014 would push content costs nearer to ~35% (vs. 28-34% historically) of TV revenue. Depreciation will also peak since the STBs swap was recently completed. However, the continued growth in ARPU, subscribers, and Adex during WC are more to offset the higher cost. Post FY15, reduction in depreciation would be another driver to earnings growth.

Shopping in Korea… The JV between ARV & GS Home Shopping is on track. Initial contribution would be minimal as it is a new phenomenon in Malaysia. Expect it to generate ~RM500m in 5 years’ time that will produce a minimum of ~9% growth to the top line based on FY15 revenue.

Outlook… Despite Government subsidy that will dampen consumer sentiment, Astro’s current penetration of ~56% (vs. China: 51%, South Korea: 95%) (See Figures #1 & #2) and its position as a strong content provider, we strongly believe that there is ample room for further subscriber growth.

1QFY15… 1QFY15 slated for 3rd week of June and we expect it to be in line with PAT forecast of RM584m.

Risks

Unexpected economic slowdown; Threat of new players; High content costs; and Regulatory risks.

Forecasts

Unchanged.

Rating

BUY

We maintain our BUY call on Astro due to its stronger FCF growth and completion of high capex phase for B.yond set top box swap out exercise which will translate into strong earnings growth ahead.

Positives: (1) Monopoly of pay-TV; (2) Higher subscriber base through stronger penetration rate and ARPU growth through new product offerings; (3) Strong take-up in IPTV.

Negatives: (1) Higher than expected content costs; (2) Blocked from raising subscription rates; (3) Subsidy cuts which reduce disposable income.

Valuation

TP maintained at RM3.72, based on DCF valuation with a WACC of 6.6% and TG of 1.0%.

Source: Hong Leong Investment Bank Research - 6 Jun 2014