Highlights

Astro returns Astro will make its way back to the stock market tomorrow after being privatised more than 2 years ago at an IPO price of RM3/share, translating to a market capitalisation of RM15.5bn-16.5bn. The company continues to enjoy its dominant position as the leading media entertainment group in Malaysia and also in Southeast Asia.

Major contribution from TV Astro is not only the de facto pay-TV provider in Malaysia but is also the largest pay-TV operator in Southeast Asia by subscriber base with over 3.1m residential subscribers. Hence, the division has been the main revenue generator for the company, contributing ~95% of revenue while contributing ~90% in terms of PBT. Revenue is largely derived from subscription fees with an Average Revenue Per User (ARPU) of RM91.8/month.

Growth from TV Adex Although the TV division derives ~90% of its revenue from subscription fees, revenue from TV Adex has been growing healthily despite the current cautious Adex market particularly for the FTA TV segment. Adex revenue contribution for the TV division has grown from 4.8% in FY10 to 7% in FY12. We gather from industry sources that Astro has been “stealing” market share from the FTA TV segment as media planners see Astro as a more impactful advertising medium. Subscription still has growth As seen in Figure #2, although Astro has a TV household penetration rate of 50%, subscriber growth over the past few years seems fairly muted, indicating a maturing market.

Contrary to this view, when benchmarked against our developed neighbouring countries i.e. Singapore, Hong Kong etc., penetration rate is as high as 61% to 97%. Hence, this implies ample room for further subscriber growth.

We believe that Astro’s extensive content collection of 156 TV channels of which 68 are Astro-created channels, will slowly see more households subscribing to Astro’s offerings. The company has structured flexible packages to best suit both viewing and budget needs. The launch of new products i.e. Astro B.yond which offers High Definition shows and various other products should help boost subscriber growth.

Defence through NJOI In Feb-12, Astro has launched NJOI, which basically is a non-subscription based service with 18 free TV channels and 20 radio channels. Users only need to make a one-time payment for the set top box. With this offering, Astro is basically encroaching on the FTA TV segment whereby revenue is largely derived from Adex spending. However, we believe that this is a defensive move by Astro to create a natural entry barrier for future pay-TV operators.

IPTV first mover Although IPTV has been gaining headlines recently, we believe that the application will be low for the time being. This is because IPTV requires high quality bandwidth connection, and from ITU’s data, wired-broadband subscription is only ~8%.

Hence, IPTV usage will be largely confined in the urban areas first. Based on 2QCY12 TM and Maxis statistics, there are only ~335k residential wired-broadband subscribers. Although making up only ~10% of Astro’s existing subscribers (assuming no cannibalisation effect), Astro has made a move to bundle their services with TimeDotCom and Maxis.

Business as usual for radio Astro operates 9 commercial radio stations and likewise with the pay-TV division, it dominates the radio Adex market with more than 50% of market share. In terms of income contribution, the radio division contributes 4- 6% of revenue and 8-10% of PBT. We expect it to be business as usual for the division.

Risks

Threat of new players We do not view the threat posed by other over-the-air broadcasters seriously due to the huge investment outlay needed and hurdles faced in taking away Astro’s market share due to its dominant position. We believe that Astro’s closest rival will come from the IPTV segment. Hence, Astro has tied-up with the likes of Maxis and TimeDotCom to broadcast via the Internet.

High content costs Content costs are expected to continue rising, and subscription fees will have to be raised in order to mitigate cost pressures. We believe that the management’s collective years of experience will be able to exercise good judgement when it comes to content investment.

Regulatory risks Astro’s broadcasting license is subjected to extensive regulation for renewal approvals. However, given the company’s reputable track record, we believe that renewals should not pose a problem.

Forecasts

Assumptions We have forecasted Astro’s subscription revenue to grow by 7.6-7.8% over the next few years underpinned by subscriber base and ARPU growth of 3.5% and 4.0% respectively. Both TV and radio Adex revenue is expected to grow by ~6.5%.

Earnings to rebound Earnings for FY13 is expected to contract by 31.8% due to higher depreciation charges on its new TV set top box, higher customer acquisition cost and higher financing charges. Going forward, we expect earnings to recover, growing by between 10-24%, hence translating to earnings CAGR of 15% from FY14- FY16.

Dividends Astro has a committed dividend payout policy of 75%. Hence, at the IPO price of RM3/share, this translates to a dividend yield of ~2.1%.

Rating and Valuation

DCF valuation We value Astro based on discounted cash flow (DCF) method with a WACC of 7.3% (see Figure #7 for assumptions). This works out to a valuation of ~RM16.5bn or RM3.16/share. This has an implied P/E of 31x based on FY14 earnings.

Initiate with HOLD Although we favour Astro for its monopolistic position in the pay- TV segment and professionally well-run company, the potential upside is less than 10% from our TP of RM3.16. Hence, we initiate coverage on Astro with a HOLD call.

Source: Hong Leong Investment Bank Research - 18 Oct 2012