News     In a Bursa announcement, Astro Malaysia Holdings (Astro) announced that its wholly-owned subsidiary, MEASAT Broadcast Network Systems (MBNS) has entered into an agreement with MEASAT Satellite Systems (MSS) for the utilisation of transponder capacity on the MEASAT-3c (M3c) satellite for a total fee (for 15 years) of USD166.4m (c.RM497.5m) to be satisfied in cash.

MBNS will utilise the transponder capacity of six Ku-band transponders on the M3c satellite in five tranches  over a period of 15 years commencing from the date of completion of the in-orbit testing of the M3c satellite.

During the term, MBNS has the option to put one or more of the Ku-band transponders in Tranches 1 to 5 to MSS to resell to third party customers. As the put option will not relieve MBNS of its payment obligations to MSS, MSS will share with MBNS the nett revenue from the re-selling transaction.

MBNS shall pay MSS a deposit in two instalments amounting to a total USD10.0m (RM30.0m) upon receipt of an invoice for payment of the Deposit from MSS.

The M3c satellite is expected to be launched by the third quarter of 2015.

Comments    We understand that the proposed utilisation is intended to act as back-up capacity should the M3b satellite fail to launch and commence operations successfully in 2014 or if there is a breakdown in any of the AMH Group’s Ku-band transponders currently utilised on the MEASAT-3 satellite, MEASAT-3A satellite and the forthcoming M3b satellite. 

Notably, the additional transponders on the M3c are also required to expand the AMH Group’s broadcasting capacity to support the transmission of additional high definition channels to its subscribers. 

Outlook    We believe that Astro's outlook remain intact underpinned by: i) a decent subscriber growth on the back of the encouraging subscription of its Maxis-Astro IPTV offering and its pay-TV services ii) a sustainable ARPU growth driven by the take-up of more value-added services. 

Forecast    As this proposed utilisation is a finance lease, the present value of all future payments for the fee (c.RM500m) will be disclosed as borrowings, meanwhile, the transponders on the M3c satellite utilised by Astro will be capitalised as an asset at the commencement of the utilisation.

As the fee payment in five tranches will only start commencing from FY16, there is no impact to our FY14 and FY15 earnings estimates. 

Nonetheless, as our DCF valuation is based on a 10-year period discounting basis, we have imputed the abovementioned total to be split over 15 years starting from FY2016, which will still affect our DCF valuation.

Rating  MAINTAIN OUTPERFORM

Valuation     Our TP has been lowered to RM3.29 from RM3.38 previously based on a 10-year explicit DCF valuation (WACC: 8.9%, Beta: 1.0, Terminal growth: 1%), which implies an FY14 PER of 37.0x. 

Risks    Lower than expected subscriber growth.

Escalation of content cost.

Source: Kenanga