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.