We walked away from a company visit with our optimism on Astro’s prospects scaled down slightly. Its content costs are expected to surge in FY17 in view of the additional sport contents coupled with an unfavourable exchange rate. We understand that management may review its packages pricing in the coming months to partially mitigate the higher content cost ahead. On market competition, the recent launched of Netflix is likely to pose a lesser threat as compared to piracy/OTT players, and could potentially provide an opportunity to Astro should there be any changes to regulations. Post-visit, we lowered our FY16/FY17 net profit forecast by 15%/25%. Correspondently, our DCF-driven (WACC: 9%; Beta: 1.0; Terminal Growth: 1%) target price is also reduced to RM2.93 from RM3.30 previously.

Higher content costs ahead. The group’s broadcasting costs are expected to surge to RM1.9b (or 37% of its TV segment’s revenue) in FY17, no thanks to the additional sport contents on Euro 2016 and Olympic. Barclays Premier League (BPL) broadcasting rights discussion, meanwhile, are still on-going where Astro has until August to seal the rights before the season kick-off. On top of that, the unfavourable forex is also driving the content costs higher despite some savings recognized following a series of renegotiations. Astro highlighted that for every 10 sen depreciation against the USD, its PBT could potentially weaken by RM30m.

A rate hike is imminent. Escalating content costs may leave Astro no choice but to revise its subscription fee. We understand that Astro may rationalise its packages and pricing (mainly on its sports contents) in the coming months, boosting its FY17 ARPU to RM101/month from RM99.30/month currently. Although the potential rate hike could lead to higher churn temporarily, Astro believes the rate would eventually normalise at 10%.

Threat or Opportunity? Netflix is unlikely to pose an immediate threat to Astro as compared to piracy/OTT players given the former’s lack of local vernacular, sports and other live contents (where Astro have a strong presence in these areas) while the latter could potentially carry its channels for merely minuscule costs. Should there is any change in ruling (i.e. video censorship and etc.) following the entry of Netflix, we believe it could provide an opportunity to the group on these untapped markets. Meanwhile, piracy/OTT threat is not new to Astro, where the group has taken various efforts to address the threat. Strategies on this front include introducing new integrated bundle services, to provide live contents and etc. in order to enhance its subscribers’ value constantly.

NJOI and Home Shopping segments drive future growth. While Astro believes its Pay-TV segments’ subscription growth rate could remain sluggish (as a result of the challenging economic outlook), its subscriptionfree satellite TV - NJOI services, are expected to continue to lure more subscribers and drive the TV household penetration rate to 83% by year 2021 from the current 66%. Home Shopping business’s prospect, meanwhile, remains bright in view of the rising e-commerce trend and ability to cross sell its products to the multiple platforms.

Lower earnings forecast. We have lowered our FY16/FY17 earnings forecast by 15%/25%, after revising our assumptions on: (i) content costs to RM1.7b/RM1.9b (from RM1.6b/RM1.7b previously), (ii) ARPU to RM99.5/RM101 (vs. RM100/RM103 previously), and (iii) FY17E TV household penetration rate to 71% (from 75% previously).

Source: Kenanga Research - 27 Jan 2016