Astro Malaysia Holdings

Malaysia Company Guide Astro Malaysia Holdings Version 12 | Bloomberg: ASTRO MK | Reuters: ASTR.KL Refer to important disclosures at the end of this report DBS Group Research . Equity 18 Jul 2019 BUY Staying resilient Last Traded Price ( 17 Jul 2019): RM1.45 (KLCI : 1,657.53) Price Target 12-mth: RM2.00 (38% upside) (Prev RM2.00) Maintain BUY with unchanged RM2.00 TP. Understandably, topline growth for Astro is challenging given the structural Analyst changes in the pay-TV industry and present threat of piracy. Woo Kim TOH +60 32604 3917 [email protected] Nonetheless, we are encouraged by the cost-optimisation What’s New initiatives undertaken by Astro to sustain its earnings, while we await fresh catalysts to emerge. These include: 1) Stricter Low-value subscribers are churning out; ARPU relatively regulation and enforcement to curb online piracy; and 2) stable Attractive bundling proposition to increase the stickiness of its Piracy remains a big issue that will take time and effort subscriber base. At current price, Astro is trading at an from both Astro and MCMC to solve undemanding valuation of 11.4x FY20 EPS and offers 7% net Strategic partnership with OTT providers to drive better dividend yield. We reiterate our BUY recommendation with value and experience for subscribers unchanged RM2.00 TP. Maintain BUY with DCF-based RM2.00 TP; valuation undemanding at 11.4x FY20 EPS and 7% net yield Where we differ: Our FY20-21 earnings forecast is above consensus. We assume no subscriber growth in FY19-21 on the back of relatively flat average revenue per user (ARPU). We Price Relative expect forex tailwinds and cost savings initiatives to help RM Relative Index improve margins, especially from FY20 onwards. 214 3.0 194 174 2.5 154 134 Potential catalysts. We believe a turnaround in consumer 2.0 114 94 sentiment will be positive for the company, as it could drive pay- 1.5 74 54 1.0 34 TV subscriber growth and positive ARPU trend. Stricter Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Astro Malaysia Holdings (LHS) Relative KLCI (RHS) regulation to curb online piracy would also help to drive consumers back to the legal market. Forecasts and Valuation FY Jan (RMm) 2019A 2020F 2021F 2022F Revenue 5,479 5,441 5,541 5,665 Valuation: EBITDA 1,650 1,669 1,693 1,762 Our RM2.00 TP is based on DCF valuation – assuming 8.9% Pre-tax Profit 651 879 959 1,081 WACC and 1.0% terminal growth. This implies 15.7x FY20 PE. Net Profit 463 664 724 805 Net Pft (Pre Ex.) 575 664 724 805 Net Pft Gth (Pre-ex) (%) (15.3) 15.6 9.1 11.2 Key Risks to Our View: EPS (sen) 8.88 12.7 13.9 15.5 Weak consumer sentiment. Weaker consumer spending may EPS Pre Ex. (sen) 11.0 12.7 13.9 15.5 also compel consumers to subscribe to cheaper packages, EPS Gth Pre Ex (%) (15) 16 9 11 and/or lead to a higher churn rate. Diluted EPS (sen) 11.0 12.7 13.9 15.5 Net DPS (sen) 9.00 10.0 11.0 12.0 BV Per Share (sen) 11.2 14.0 16.9 20.3 At A Glance PE (X) 16.3 11.4 10.4 9.4 Issued Capital (m shrs) 5,214 PE Pre Ex. (X) 13.2 11.4 10.4 9.4 Mkt. Cap (RMm/US$m) 7,561 / 1,837 P/Cash Flow (X) 4.0 5.9 5.1 6.0 Major Shareholders (%) EV/EBITDA (X) 6.4 6.1 5.8 5.5 Khazanah Nasional Bhd 20.7 Net Div Yield (%) 6.2 6.9 7.6 8.3 Usaha Tegas Group 41.0 P/Book Value (X) 12.9 10.4 8.6 7.1 T. Rowe 5.1 Net Debt/Equity (X) 4.2 3.1 2.2 1.7 ROAE (%) 74.7 101.1 90.1 83.1 Free Float (%) 36.8 3m Avg. Daily Val (US$m) 0.67 Earnings Rev (%): 0 0 0 Consensus EPS (sen): 12.2 12.4 11.5 ICB Industry : Consumer Services / Media Other Broker Recs: B: 11 S: 1 H: 5 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P ed: CK/ sa: WMT, PY, CS Company Guide Astro Malaysia Holdings WHAT’S NEW Staying resilient in a challenging market Managing its subscriber base. Amid relatively weak Legal SVOD penetration per capita, 2018 consumer sentiment in Malaysia, we estimate Astro has been 45% experiencing pay-TV subscriber loss in six out of the previous 40% 40% 38% eight quarters. Astro alluded that it is trying to manage its 35% subscriber base, and we note that the company seems to be 30% 30% 24% more willing to let go of low-value customers and shift them 25% to its freemium service, i.e. Njoi. This is reflected in the pay-TV 20% 14% ARPU trend, which has remained very stable at about 15% 13% 12% RM100/month over the last three years, despite the weak 10% 8% 7% 4% 4% subscriber trend. 5% 2% 1% 1% 0% Estimated Astro pay-TV subs and ARPU Pay-TV subs (LHS) ARPU (RHS) 3,600 102 Sources: Asia Video Industry Report 2019 100 3,400 MCMC to play a more active role. Astro is working closely 98 3,200 with MCMC to curb online piracy, including exploring 96 regulatory measures such as a ban on ISDs. At the moment, 3,000 we observe that MCMC has stepped up its enforcement 94 against distributors and sellers caught with ISDs. Other 2,800 92 potential measures in the future could include dynamic 2,600 90 blocking of illegal streaming websites – in layman terms, Internet Service Providers (ISPs) will have to also block other websites that point users to copyright-infringing websites. This measure is to target a common method employed by piracy Sources: Company, AllianceDBS estimate Note: Astro stopped providing pay-TV subscriber figure since 2QFY18 websites where they use alternative Web addresses to avoid the access to their content being blocked. Piracy is a bigger issue. Although the decline in Astro’s pay- TV subs can be partly attributed to the rising popularity of We believe curbing online piracy would help to drive Subscription Video-on-Demand (SVOD) Over-the-Top (OTT) consumers back to the legal market (whether pay-TV or OTT), services such as Netflix and iFlix in recent years, the fact although it hard to quantify the impact for now. At the very remains that take-up rate of these services are still very low in least, it should discourage or make it very cumbersome for the Malaysia. According to the Asia Video Industry Association average consumers to access pirated content. (AVIA) Report 2019, legal SVOD OTT penetration in Malaysia is Strategic partnership with OTT. Astro has recently entered estimated to be at only 4%, compared to 30-40% for into a strategic partnership with iQIYI, a leading SVOD service developed economies in the Asia Pacific region (see chart from China, in June. This gives Astro exclusive rights to deliver below). iQIYI content on TV, On Demand and OTT in Malaysia. We believe the bigger issue here is about piracy. Based on a Similarly, Astro also managed to negotiate for OTT rights from survey commissioned by AVIA’s Coalition Against Piracy, it is HBO at no extra cost, which will give its Movie Pack customers found that 25% of Malaysian consumers use a TV box to access to HBO GO contents going forward. stream pirated TV and video content. And, of the 25% of We expect Astro to continue to explore such deals with OTT Malaysian consumers who purchase illicit streaming device providers whenever possible, in addition to growing and (ISD), three in five respondents stated that they cancelled all or enhancing its own OTT app, Astro GO. Such measures are some of their subscription to legal pay-TV services. necessary to align with changing consumers’ viewing habit (basically anytime, anywhere), helping Astro to defend its APRU and stem cord-cutting by its subscribers in the longer term. Upcoming initiatives in 2HCY19. Astro is in the midst of making enhancement across its Astro and Astro GO services in order to provide a seamless and unified user interface experience. Besides that, the company is also planning to Page 2 Company Guide Astro Malaysia Holdings introduce 4K Ultra HD services to its subscribers, hopefully assuming minimal subscriber net addition (0-1% annually), before year end. flattish ARPU, and Astro’s pay-TV household penetration rate to decline to 40% in the long term (from c.45% currently), We understand Astro is also interested in offering bundled which we deem reasonable. We forecast EBITDA margins to products, combining its pay-TV services with broadband plans stay within 30-31%, which is at the lower range of from other service providers. Multiple negotiations are still on- management guidance of 30-35%. going, which we believe are with existing partners such as Maxis and TIME. Maintain BUY with unchanged DCF-based TP of RM2.00. Our DCF-based TP for Astro remains unchanged at RM2.00 (WACC 8.9%, TG 1.0%), implying an undemanding valuation Valuation and recommendation of 15.7x FY20 PE. Based on the current price, the stock offers a very attractive net yield of 7% (based on its minimum payout Earnings underpinned by cost optimisation initiatives. policy of 75%). Without a doubt, topline growth for Astro is a challenging task given the on-going structural changes in the pay-TV industry and present threat of piracy.

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