MEDIA ASTRO MALAYSIA
(ASTRO MK EQUITY, AAAN.KL) 05 Feb 2018
Beating the odds like Astro Boy Company report BUY
Lavis Chong (Upgraded) [email protected] 03-2036 2291 Rationale for report: Company update
Investment Highlights Price RM2.57 Fair Value RM3.10 52-week High/Low RM2.94/RM2.45 We are upgrading Astro Malaysia Holdings (Astro) from a HOLD to BUY with a higher fair value of RM3.10/share Key Changes (previously RM2.90/share), derived from DCF with a Fair value discount rate of 8% and terminal growth rate of 2%. We EPS have tweaked our FY18F-FY20F net profit forecasts by 1- 5% for housekeeping reasons. YE to Jan FY17 FY18F FY19F FY20F We came away from a company visit gaining more clarity Revenue (RM mil) 5,612.6 5,729.3 5,746.2 5,880.0 on the company's direction and prospects. We believe Core net profit (RM mil) 638.8 774.5 801.3 811.9 FD Core EPS (sen) 12.1 14.7 15.2 15.4 Astro would see improvements in adex in FY19 due to FD Core EPS growth (%) 2.3 21.2 3.5 1.3 two notable sporting events this year, namely the Consensus Net Profit (RM mil) - 743.1 757.2 840.5 PyeongChang 2018 Winter Olympics and the 2018 FIFA DPS (sen) 12.5 12.0 12.0 12.0 World Cup. In our opinion, the events are far more PE (x) 21.3 17.5 16.9 16.7 enthralling compared to those of 2017, during which the EV/EBITDA (x) 7.8 7.1 6.8 6.6 SEA Games and Merdeka celebration were the only 4.6 4.7 4.7 4.7 Div yield (%) notable events. ROE (%) 101.9 113.1 96.0 79.9 Net Gearing (%) 485.9 394.2 284.6 208.4 From our historical checks, Astro's TV adex grew 7% YoY
Stock and Financial Data and 39% QoQ during the quarter that the 2014 FIFA World Cup was held (2QFY15). Similarly, the group's radex Shares Outstanding (million) 5,209.5 expanded 9% YoY and 35% QoQ. Market Cap (RMmil) 13,388.5 Book Value (RM/share) 0.12 Astro is expected to benefit from the strengthening MYR P/BV (x) 21.5 after its hedging contracts expire in 6-12 months' time. ROE (%) 101.9 Currently, circa 70% of its content costs are denominated Net Gearing (%) 485.9 in USD, while receipts are based in MYR. We estimate that every 1% depreciation in USD/MYR would improve Major Shareholders Pantai Cahaya Bulan Ventures(20.7%) Astro's earnings by 1.5% assuming the absence of Astro Networks Malaysia(19.5%) hedging. E Asia Broadcast(8.1%) Free Float 32.5 We believe the imminent ASO in June 2018 creates Avg Daily Value (RMmil) 8.1 opportunities for the group to increase NJOI's household penetration. Besides a potential increase in NJOI Price performance 3mth 6mth 12mth revenue, higher household penetration also broadens the addressable market of Go Shop and bodes well for the Absolute (%) (8.2) (3.0) (9.2) Relative (%) (14.6) (8.0) (18.2) group's pay-TV subscriber base as the upgrade process from freemium to premium service is seamless
4.0 2,000 Astro has embarked on several digitalisation initiatives to 3.5 1,800 improve operational efficiencies, including replacing call 1,600 centre personnel with chatbots to attend basic customer 3.0 1,400 queries and moving film storage from physical servers to 2.5 1,200 cloud (Amazon Web Services). These initiatives are 2.0 1,000 estimated to bring about cost savings of circa RM30mil in 800 FY19F and RM40-50mil/year subsequently. 1.5 600 1.0 Tribe’s user base has rapidly grown to 2.5 million 400 registered users as of 3QFY18. While the contribution to 0.5 200 the top line remains immaterial at this juncture, we are 0.0 0 mindful that the group could raise its subscription fees in Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 the future to improve ARPU. Leveraging the group's
ASTRO MK FBMKLCI Index existing content library, Tribe could command handsome operating margins and generate meaningful contributions to the bottom line going forward.
Astro Malaysia 05 Feb 2018
NEAR-TERM CATALYSTS Imminent ASO opens up new market for Astro Major sporting events to fuel adex and NJOI revenue According to the Ministry of Communications and Multimedia, analogue switch-off (ASO) is expected to be There are two notable sporting events this year, namely the implemented in June 2018.After the ASO, video contents PyeongChang 2018 Winter Olympics, which will be held in will no longer be broadcast through analog signals but via February, and the 2018 FIFA World Cup, which will take digital transmission, which requires either a decoder/set- place in June and July. In our opinion, the events are far top box (STB) or an integrated digital televisions (iDTV) for more enthralling compared to those of 2017, during which content reception. The perks are, better quality contents, the SEA Games and Merdeka celebration were the only better audio features (surround sound) and potentially notable events. more free channels for households. In addition, digital TVs are uninterrupted by weather conditions. In light of the events, we believe Astro would see improvements in advertisement volume and adex rates in However, we note that households, who are non-BR1M FY19. In our revenue forecast, we are projecting a 3% recipients, are ineligible for a complimentary MYTV growth in TV adex and a 7% growth in radex in FY19. The decoder/STB. This group of households is required to two income streams collectively accounted for circa 12% of purchase MYTV Advance decoder for digital TV group revenue in FY17. transmission. We believe the hassle would open up opportunities for other competitors such as NJOI and Unifi From our historical checks, Astro's TV adex grew 7% YoY TV (previously known as HyppTV). To draw salient and 39% QoQ during the quarter that the 2014 FIFA World comparisons, NJOI offers the highest number of free TV Cup was held (2QFY15). Similarly, the group's radex and radio channels among the three, and is slightly expanded 9% YoY and 35% QoQ. cheaper to own compared to MYTV (see Exhibit 2).
Apart from adex, we believe the two sporting events in In view of this, we believe the imminent ASO in June 2018 2018 would incentivise spending on NJOI (Astro's non- creates opportunities for Astro to increase NJOI's subscription based satellite TV), thus increasing ARPU of household penetration. Besides a potential increase in the platform. Currently, ARPU of the platform is NJOI revenue, higher household penetration also broadens approximately RM2/month. For NJOI users who wish to the addressable market of Go Shop (Astro's home tune in to FIFA-streaming channels (Astro Supersport and shopping business) and bodes well for the group's pay-TV Supersport 2), the price is RM5.30 for 3 days for each subscriber base as the upgrade process from freemium to channel, and RM21.20 for 30 days for each channel. premium service is seamless.
Strengthening ringgit means cheaper content and Digitalisation initiatives to improve bottom line lower finance liabilities one year from now Astro has embarked on several digitalisation initiatives to Astro's content costs typically make up 33-37% of group improve operational efficiencies. These include, among revenue, of which 70% is tied to the purchase of others, replacing call centre personnel with chatbots to international/sports programmes and billed in USD. Put attend basic customer queries and moving film storage simply, Astro's USD-denominated content costs account for from physical servers to cloud (Amazon Web Services). circa 23-26% of group revenue, whereas receipts are largely based in MYR. Therefore, the group is a net Management has said that these initiatives would boost beneficiary of the strengthening of MYR. productivity, improve contents' uploading speed,reduce cost to serve, and enhance customer experience. In However, we note that Astro has hedged the entire USD addition, it would switch the group's film library exposure of its content costs for the next 6-12 months. In management from a capex model to opex. To sum up, other words, the positives would only be felt from 2HFY19 these initiatives are estimated to bring about cost savings or FY20 onwards. Upon the expiry of the hedging of circa RM30mil in FY19F and RM40-50mil/year contracts, we estimate that every 1% depreciation in subsequently. USD/MYR would improve Astro's earnings by 1.5%. The group has also been building capabilities in software Other than content costs, some of Astro's liabilities are development, artificial intelligence and data analytics. repaid in USD, e.g. the lease of Measat 3b satellite and These technologies are capable of analysing a vast vendor financing. Notably, the unhedged portion of Astro's database of customer info and habits to segregate them finance lease liabilities as of 3QFY18 was US$298mil, into segments which are useful for targeted ads, thus which would have to be adjusted downwards given lower creating value-add for advertisers. projected USD lease payments. From our estimates, that every 0.10 change in USD/MYR would translate into circa RM30mil in foreign exchange gains (contributing directly to PBT).
AmInvestment Bank Bhd 2 Astro Malaysia 05 Feb 2018
EXHIBIT 1: PRICE OF SPORT CHANNELS SUBSCRIPTION
Source: Company
EXHIBIT 2: TV PROVIDERS COMPARISON
Decoder+installation No. of free TV No. of pay TV charges channels channels available No. of radio channels Astro NJOI RM450 29 43 20 myFreeview (enabled by MYTV decoder) RM479 9 none at the moment none at the moment Comes with a unifi Unifi TV internet package 25 56 2 Source: SimilarWeb
AmInvestment Bank Bhd 3 Astro Malaysia 05 Feb 2018
ASTRO’S OTT VENTURE GROWING RAPIDLY KEY RISKS
Tribe is Astro’s over-the-top (OTT) service aimed at Competition from OTT, IPTV and illegal TVs keeping pace with the changing paradigms of media landscape – TV consumers switching to mobile devices. Competition could intensify as smooth (no latency) content First launched in Indonesia in March 2016, Tribe’s user streaming becomes possible with high-speed internet. This base has rapidly grown to 2.5 million register users as of could increase the demand for popular OTT products such 3QFY18. as Netflix and HBO Now.
In contrast to prominent players like Netflix and Hulu, However, we note that while digitalisation is moving quickly Tribe’s focus is to provide vernacular and Asian contents to in the metropolis, high-speed internet remains connected millennials within the ASEAN region. Tribe underpenetrated in rural areas. This would shelter pay-TV currently has presence in 4 countries, namely Indonesia, subscriptions from churn momentarily, thus giving Astro a Singapore, Thailand and the Philippines. window for business transformation.
Strategic partnerships with Telcos for rollouts New industry entrants
Tribe’s modus operandi for rollouts is to seek strategic New entrants to the TV industry, whether it be OTT or other partnerships with telecommunication and media companies direct-to-home TVs, would pose a threat to Astro if they in each geographical market. These partnerships typically instigate a content price war. create a win-win outcome for all parties, as Tribe and the partners jointly build on customer reach and provide value- However, the risk is mitigated by Astro’s rich content library added services. Tribe has partnered with Axiata Digital and high household penetration (>73%), which create a Services in Indonesia, Singtel in Singapore and Globe high barrier to entry in the space. Telecom in the Philippines.
Meaningful bottom line contributions lie ahead
We note that Tribe’s ARPU (~US$1/month) is relatively immaterial and insufficient to overtake the revenue contribution from Astro’s satellite Pay TV. To give some context, 10 million paying customers from Tribe would translate into circa RM500mil, which represents a mere 8- 9% of FY17 revenue.
Having said that, we are mindful that Tribe could raise its subscription fees in the future to improve ARPU. Besides, management has said that the incremental content costs from additional Tribe customers is relatively low as Astro is able to leverage its existing film library serving satellite TV consumers. Not only does this create a higher barrier to entry and competitive edge for Astro in the space, being synergistic to the group’s existing business also means Tribe could command handsome operating margins and generate meaningful contributions to the bottom line going forward.
EXHIBIT 3: APP ENGAGEMENT OF VIDEO SERVICES
Source: SimilarWeb
AmInvestment Bank Bhd 4 Astro Malaysia 05 Feb 2018
EXHIBIT 4: PB BAND CHART EXHIBIT 5: PE BAND CHART
35.00 40.00
35.00 30.00 +1δ +1δ 30.00 25.00 Avg Avg 25.00 -1δ 20.00 20.00 -1δ 15.00 15.00
10.00 10.00
5.00 5.00
0.00 0.00 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
AmInvestment Bank Bhd 5 Astro Malaysia 05 Feb 2018
EXHIBIT 6: FINANCIAL DATA
Income Statement (RMmil, YE 31 Jan) FY16 FY17 FY18F FY19F FY20F
Revenue 5,475.4 5,612.6 5,729.3 5,746.2 5,880.0 EBITDA 2,172.0 2,116.2 2,315.7 2,369.7 2,377.2 Depreciation/Amortisation (1,176.1) (1,091.7) (1,071.3) (1,087.5) (1,093.8) Operating income (EBIT) 995.9 1,024.5 1,244.4 1,282.2 1,283.4 Other income & associates 8.3 1.8 - - - Net interest (174.8) (165.6) (220.7) (222.8) (209.9) Exceptional items - (15.1) - - - Pretax profit 829.4 845.5 1,023.7 1,059.4 1,073.6 Taxation (221.4) (228.5) (255.9) (264.9) (268.4) Minorities/pref dividends 7.4 6.7 6.7 6.7 6.7 Net profit 615.3 623.7 774.5 801.3 811.9 Core net profit 615.3 638.8 774.5 801.3 811.9
Balance Sheet (RMmil, YE 31 Jan) FY16 FY17 FY18F FY19F FY20F
Fixed assets 2,129.4 1,817.9 1,651.4 1,499.1 1,365.4 Intangible assets 2,001.5 2,044.6 2,072.9 2,084.0 2,080.0 Other long-term assets 681.8 696.5 696.5 696.5 696.5 Total non-current assets 4,812.6 4,558.9 4,420.7 4,279.6 4,142.0 Cash & equivalent 635.7 376.3 304.1 294.3 265.8 Stock 20.6 20.4 33.7 34.1 34.5 Trade debtors 515.2 482.9 509.4 510.9 522.8 Other current assets 916.9 827.4 827.4 827.4 827.4 Total current assets 2,088.4 1,706.9 1,674.6 1,666.7 1,650.6 Trade creditors 800.9 838.2 708.9 717.2 726.6 Short-term borrowings 519.5 629.3 707.2 661.4 613.8 Other current liabilities 961.0 812.6 812.6 812.6 812.6 Total current liabilities 2,281.4 2,280.1 2,228.7 2,191.2 2,153.0 Long-term borrowings 3,285.6 2,776.3 2,540.6 2,259.6 1,964.0 Other long-term liabilities 720.2 579.7 579.7 579.7 579.7 Total long-term liabilities 4,005.7 3,356.0 3,120.3 2,839.3 2,543.7 Shareholders’ funds 600.7 623.4 746.7 922.8 1,109.5 Minority interests 13.1 6.4 (0.3) (7.0) (13.7) BV/share (RM) 0.12 0.12 0.14 0.18 0.21
Cash Flow (RMmil, YE 31 Jan) FY16 FY17 FY18F FY19F FY20F
Pretax profit 829.4 845.5 1,023.7 1,059.4 1,073.6 Depreciation/Amortisation 1,176.1 1,091.7 1,071.3 1,087.5 1,093.8 Net change in working capital (59.3) (142.9) (169.1) 6.4 (2.9) Others (49.0) 73.4 (35.2) (42.0) (58.5) Cash flow from operations 1,897.2 1,867.7 1,890.6 2,111.3 2,105.9 Capital expenditure (131.2) (91.7) (397.0) (401.6) (406.9) Net investments & sale of fixed assets 1.7 (2.5) - - - Others (133.1) (418.0) (502.1) (528.9) (537.8) Cash flow from investing (262.6) (512.2) (899.1) (930.6) (944.7) Debt raised/(repaid) (810.9) (804.6) (157.8) (326.8) (343.2) Equity raised/(repaid) - - - - - Dividends paid (650.3) (663.8) (651.2) (625.1) (625.1) Others (197.5) (191.4) (254.7) (238.6) (221.3) Cash flow from financing (1,658.7) (1,659.8) (1,063.6) (1,190.6) (1,189.7) Net cash flow (24.1) (304.3) (72.1) (9.8) (28.5) Net cash/(debt) b/f 588.4 566.8 263.2 191.1 181.3 Net cash/(debt) c/f 566.8 263.2 191.1 181.3 152.8
Key Ratios (YE31 Jan) FY16 FY17 FY18F FY19F FY20F
Revenue growth (%) 4.7 2.5 2.1 0.3 2.3 EBITDA growth (%) 4.3 (2.6) 9.4 2.3 0.3 Pretax margin (%) 15.1 15.1 17.9 18.4 18.3 Net profit margin (%) 11.2 11.1 13.5 13.9 13.8 Interest cover (x) 5.7 6.2 5.6 5.8 6.1 Effective tax rate (%) 26.7 27.0 25.0 25.0 25.0 Dividend payout (%) 101.5 104.4 80.7 78.0 77.0 Debtors turnover (days) 34 31 32 32 32 Stock turnover (days) 10 9 14 14 13 Creditors turnover (days) 397 374 302 292 283
Source: Company, AmInvestment Bank Bhd estimates
AmInvestment Bank Bhd 6 Astro Malaysia 05 Feb 2018
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AmInvestment Bank Bhd 7