We remain LT positive on Astro due to: (i) its cost optimisation efforts and constantly fine-tuning its business strategy to improve profitability; (ii) potential re-rating catalyst from MCMC’s efforts to crack down on piracy; (iii) strong free cash-flow generation ability puts it in good stead to withstand the digital onslaught; (iv) maintain its lion share in the paid-TV households in Malaysia for its strength in the vernacular content creation; and (v) a strong appeal due to current low interest rate environment. The risk-reward profile is increasingly attractive after a 56% plunge from 52W high as it only is trading at 6x FY1/21E (68% below its 5Y mean), supported by handsome DY of at least 9.1% (similar to FY20 due to lower FY21 content cost as the two major sports events i.e. UEFA Euro Cup and Tokyo Olympics will be deferred to FY22). Technically, Astro could poised for a sideways consolidation breakout towards RM0.86-1.00 in the mid to long-term on rising volume.

Values resurface. Astro plunged 56% from 52W high of RM1.61 to a low of RM0.705, due to the dwindling revenue base (partly attributed to its strategy to revamp pay-TV customer base and service to focus on high-value premium customers and weaker consumer sentiment on discretionary spending), coupled with higher operating expenditure and intense competitions and the prevalence of still-illegal Android boxes. Having said that, we remain LT positive on Astro as its cost optimisation efforts and potential re-rating catalyst from MCMC’s efforts to crack down on piracy coupled with its strong free-cash-flow generation ability puts it in good stead to withstand the digital onslaught. Based on Bloomberg, currently it has a 76.5% Buy, 11.8% Hold and 11.7% Sell ratings with consensus TP of RM1.25.

Revamp business strategy. Astro will continue to focus on vernacular content given the strong response from viewers, as well as managing its subscriber base and product proposition to improve on its profitability. Management is looking to leverage on its large customer base to build new revenue adjacencies via Astro’s strategic partnership with Maxis to provide broadband and content bundles and expanding its over the top (OTT) content with iQIYI and HBO Asia.

Anticipate a sideways consolidation breakout on rising volume. After surging 17.6% on 24 Mar, Astro has consolidated sideways between the RM0.79-0.915 levels over the past 18 days. We believe the current consolidation phase may have been exhausted amid squeezing Bollinger Bands (BB) and a breakout is on the pipeline, supported by soaring volume of 13.2m last Friday (3.7x higher than 90D avg). A decisive breakout above RM0.86 (30D SMA) will lift prices higher to retest RM0.915 (27 Mar high) before reaching our LT objective at RM1.00. Immediate supports are situated at RM0.79 (25 Mar low) and RM0.75 (weekly lower BB). Cut loss at RM0.74.

Source: Hong Leong Investment Bank Research - 20 Apr 2020