ASTRO has entered into a strategic partnership with MAXIS to provide fibre broadband bundled with TV content. Overall, we are positive on this development as it provides ASTRO an opportunity to: (i) up-sell better TV packages and (ii) promote its home shopping segment. However, we expect meaningful earnings impact only in the longer term. Hence, we leave our OP call with our DCF-driven TP of RM2.00 unchanged for now.

Packaging a value-for-money deal. ASTRO and MAXIS have announced a strategic marketing partnership between both parties to offer bundled broadband with content. ASTRO will launch new bundles of MAXIS’s 30 Mbps and 100 Mbps broadband and content packages which could save customers up to RM720 on a 24-month contract (refer to overleaf). Existing subscribers of either service appear to be able to seamlessly repackage their current plans to accommodate the new bundles.

A win-win situation. Overall, we are positive on this development as this allows both companies to leverage their individual strength and create new revenue streams by introducing new customers. MAXIS could see a potentially higher subscription for its Broadband segment from the better value proposition (broadband with content). Subsequently, ASTRO could tap into a wider customer base to address its gradually declining subscription revenue through: (i) up-selling better TV packages and (ii) promoting its home shopping segment (Astro’s Go Shop) which is accessible in all its TV packages. Note that the shopping segment accounts for c.7% of Astro FY19 revenue. Meanwhile, we have good reason to believe that the TV Shopping trend is sustainable, as consumers are more adoptive of this medium of retailing. This is evident in Media Prima’s commendable achievement with CJ WoW Shop.

Extending its partnership beyond MAXIS? The partnership appears timely in silencing ongoing market talks on a potential merger between both companies. It appears more idealistic for two companies to stay separate rather than merged, given MAXIS’s bite size home fiber connection subscriber base at c.276k (as reported in 2Q19 results) in comparison to ASTRO TV customer base of c.5.7m YTD FY20. This arrangement would also allow ASTRO to stay flexible and potentially provide similar unique proposition to other telco players in the market.

Although the above-mentioned reasons are undoubtedly positive, we opt to stay conservative as the partnership is only at its initial stage. Furthermore, MAXIS’s current home fiber connection base is relatively small compared to ASTRO. Hence, we make no changes.

Maintain our OUTPERFORM and DCF-driven TP of RM2.00. Our target price (based on WACC: 10.8%, TG: 1%) implies FY20 PER of 14.7x (-1.5SD level to its 5-year mean). Among the media companies under our coverage, we think that ASTRO is currently trading at a cheap valuation of FY20E PER of 11x vs. our media coverage average of 15x. Moreover, we continue to like ASTRO for its attractive dividend yield (more than 7%) while earnings remain relatively resilient.

Risks to our call include: (i) lower-than-expected subscription and adex revenue, and (ii) higher-than-expected content cost and operating expenses.

Source: Kenanga Research - 16 Aug 2019