Highlights

• We walked away from a one-on-one meeting with Astro last week with no surprises.
• There are few key takeaways moving into FY19: i) Higher content cost (a heavy sports year); ii) Shifting focus to more vernacular content; and iii) Focus to expand its digital platform (EGG, OTT, and Digital Blaze).
• The group expects its content cost to increase in FY19 mainly due to the high number of sporting events, which include major events like the FIFA World Cup 2018, 2018 Asian Games and Gold Coast 2018 Commonwealth Games. The group expects the total content cost to come in at 36% of TV revenue in FY19. For non-heavy sports years, content cost would hover around 32-33% of TV revenue.
• As of now, Astro?s content consists of 30% of local content and 70% of international and sports contents. The group is targeting to shift the focus to more vernacular content to achieve a more balance combination of 50% of local content and 50% of international and sports contents.
• The recent joint venture with Karangkraf Digital 360 would allow Astro to pursue co-creation of comprehensive line-ups of content IPs across the Malaysian and Islamic verticals. With the ownership of these new IPs Astro will be able to capture the rising demand of vernacular content across Nusantara.
• On the digital side, EGG will be expanding to another two countries this year increasing its presences to 8 countries.
• Outlook: Astro has remained resilient amidst the soft consumer/business sentiments and managed to improve its advertising revenue despite the contraction in overall adex revenue. However, we remain sceptical on Astro?s ability to regain subscription revenue as we opine that pay-TV platform will remain challenging moving forward.

Risks

• (1) Unexpected economic slowdown; (2) Threat of new players; (3) High content costs; (4) Regulatory risks; (5) Shift to digital alternatives; and (6) DTTB as substitution for consumers and advertisers.

Forecasts

• Unchanged

Rating

HOLD (↔)

• Astro is facing dismal adex growth, due to weak consumer sentiment. Besides, the challenging business environment from aggressive shifts in the media platforms from traditional to digital is leaving the company in a tough position.

Valuation

• We maintain HOLD with an unchanged TP of RM2.49 based on DCF valuation (WACC of 8.4% and TG of 1.0%).

Source: Hong Leong Investment Bank Research - 19 Feb 2018