- We initiate coverage on Astro Malaysia Holdings, with a HOLD and a fair value of RM2.89/share, based on a 10% discount to our DCF value of RM3.21/share.

- On the revenue front, growth will be supported by:- (1) Growing subscriber base by net additions of 147k-228k p.a., implying penetration of 48%-51% for FY13F-FY15F; and (2) Higher ARPU boosted by HD, arising from the migration of existing subscribers to B.yond STB by end-FY14F. As such, HD take-up rate is estimated to hit 38% in FY13F and jumping to 45% in FY14F, followed by 55% in FY15F ' translating into residential ARPU of RM93 and RM97 for FY13F and FY14F, respectively. Notwithstanding this, the recent NJOI rollout is a  positive, targeting the lower income segment and rural areas. We assume NJOI ARPU of RM2 and RM4 for FY14F and FY15F, respectively.

- Nonetheless, we expect EBITDA margin to shrink to 31% in FY13F from 36% on the back of higher operating expenses stemming from:- (1) Rising content cost from the recent Euro 2012 and London Olympics. We assume content cost to rise to 35% from 32% in FY13F and thereafter, remain steady at 33% (inclusive of rights of BPL); and (2) Step-up of customer acquisition cost (CAC) arising from STB conversion by 5% and 8% for FY13F and FY14F, respectively. After that, we expect CAC to remain flat.

- Having said that, Astro's earnings are expected to remain under pressure in the medium term, particularly for FY13F and FY14F because:- (1) Depreciation and amortisation of the B.yond STB is estimated to jump by 17%-32% in the next three years; and (2) Finance cost is expected to climb by more than 100% in FY13F, resulting in earnings dipping by 30%. This is mainly underpinned by higher vendor financing on the back of the rising number of B.yond STB conversions, finance lease for satellite transponders and a new satellite, MEASAT 3B, in FY15F. Nevertheless, we project earnings to rebound by 19% in FY15F. 

- Astro is committed to paying out at least 75% of earnings starting from FY14F onwards. But, based on our estimates, DPS is 6.4 sen, translating into an unattractive dividend yield of 2.4%. Our projection shows that FCF will only rise meaningfully from FY16F onwards, as capex cycle would peak in FY15F. FCF yield stands at 4.7% in FY14F. 

- We opine that any upside in dividends would kick-in after two years as Astro is unlikely to leverage on its balance sheet to gear up for dividends given that capex has not stabilised. Net gearing is within 50%-55% for FY13F-15F. Net debt/EBITDA ratio was comfortable at 2.3x as at end-FY12, and is projected at 2.0x for FY13F. 

- Our HOLD view is underpinned by its monopoly position ' conquering 99% of the pay-TV in Malaysia and strong franchise value due to superior content portfolio.   

Source: AmeSecurities