10 NEWS StarBiz, Thursday 25 October 2012
Astro has room for growth
Analyst Reports
ASTRO MALAYSIA HOLDINGS BHD
By MIDF Research
Buy (initiate coverage)
Target price: RM3.40
THE previous Astro All Asia Networks Plc (AAAN) was listed on Oct 29, 2003 but was delisted on June 14, 2012 following a general offer by its major shareholders. While AAAN comprised both the overseas and Malaysian operations, the new listed entity of Astro Malaysia Holdings Bhd involves only the Malaysian operations. The licence to provide direct-to-home (DTH) satellite multi-channel subscription television in Malaysia is exclusively held by Astro until 2017. It also holds it on a non-exclusive basis until 2022. The presence of various ethnic groups and the variances in their income growth accords an opportunity for Astro to pursue a unique growth strategy. Astro has a unique approach in which its package offerings are segmented based on genres and vernacular. This allows subscribers to customise their package based on tastes and languages.
We believe that this approach his highly advantageous, as it will ensure efficient average revenue per user (arpu) maximisation and capture. We also believe that with this approach, Astro will be well positioned to drive subscription growth and arpu going forward. We expect rising household income to drive arpu further as subscribers upgrade their packages. Malaysia's subscribers for pay-TV services grew from two billion in 2006 to over 3.3 million in 2011, representing a compounded annual growth rate (CAGR) of 10% over the period. Even in the face of the economic recession in 2009, the pay-TV subscriber base grew by 11%, reflecting the robustness of pay-TV demand. Subscription revenue grew at a strong CAGR of 12%, from RM2.1bil in 2007 to RM3.3bil in 2011. Astro holds a commanding market share and is the leader in pay-TV market segment with 99% market share. The penetration rate for pay TV was still only 50% as at end-2011, signifying that the market is not yet saturated. The room for growth is therefore evident. Astro's main strength is undoubtedly its content. It provides local content via its 68 Astro-created and branded channels including 22 high definition channels to serve Malaysia's three main ethnic groups.
In the last financial year ended Jan 31, 2012 (FY12), it produced 8,000 hours of TV content. We believe that the popularity of its local content, such as the “Maharaja Lawak” series, which has a peak viewership of over one million, has been a catalyst for subscribers to upgrade their packages. Its strong local content will be another arpu growth driver. Astro also provides international and regional content via channels such as HBO, National Geographic, Discovery and Asian Food Channel, which gives Astro a competitive advantage. This is especially the case for its Korean channels KBS World and SOne, which air popular Korean dramas.
Astro currently holds the rights to broadcast popular sporting events such as the Barclay's Premier League, which we believe limit the number of potential churn. While the rights are up for bidding for the 2013/2014 to 2015/2016 seasons, we expect that Astro will continue to be the rights holder for Malaysia given that it has a significantly higher subscriber base to amortise its cost and the widest possible audience capture as compared to its competitors.
We view positively on Astro's recent tie-up with Maxis to offer its content via IPTV and high-speed broadband (HSBB) bundle. This will moderate the potential churn given that subscribers who are planning to opt for IPTV via HSBB may be persuaded to stay with Astro. One factor that will limit the downside is the low levels of pay-TV piracy, where individuals are able to illegally watch pay-TV channels without paying or paying substantially less to an illegal operator. Based on an estimate by The Cable & Satellite Broadcasting Association of Asia, the pay-TV piracy in Malaysia was only 2% of all viewers in 2011, compared with 69% in Indonesia and 61% in Thailand.
We are not concerned with our expectation of an earnings decline of 42.3%to RM365.9mil in FY13 following the 15.2%dip to RM634.2mil in FY12. This is due to our assumption of accelerated depreciation on some of its assets. We expect earnings to rebound by 64% to RM600mil in FY14 as the depreciation normalised while revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) grow robustly. Astro's revenue has been on a steady upward trend, increasing from RM3.2bil in FY10 to RM3.7bil in FY11 and RM3.9bil in FY12. The EBITDA has also trended upwards, rising from RM802mil in FY10, to RM1.2bil in FY11 and RM1.3bil in FY12.
We expect this uptrend to continue in FY13 and FY14 as we are projecting a revenue growth of 9.3% year-on-year end 9.4% year-on-year to RM4.2bil and RM4.6bil respectively. This will be driven by subscribers' growth, higher arpu and higher take-up rate for its B.yond package. We also expect EBITDA to register a growth of 1.8% year-on-year. Astro's risks include high dependence on Measat-3 and Measat-3A, and its expansion plans dependency on the launch of Measat-3B. We believe that Astro has room for growth given that pay-TV penetration rate is only 50%. We like the fact that Astro subscriber growth continues to be robust even in the years when the economy contracted.
We expect arpu growth to be maintained due to rising household income and Astro's ability to entice subscribers to upgrade. In addition to its growth, we believe that Astro is a good defensive play given its stable business and decent dividend yield. Astro has stated that it aims for a dividend payout ratio of 75%. Based on our financial year 2014 earnings forecast, this would translate into a dividend per share of 8.6 sen. This represents a dividend yield of 3.1% based on current price of RM2.77.
We initiate our coverage on Astro with a "buy" recommendation with a target price of RM3.40.
