Neutral | Fair Value:RM 2.85

The largest pay-TV operator in Malaysia is set to be floating again on Bursa Malaysia on 19 October with a market cap of RM15.6bn. A household name with Malaysians, large scale IPOs traditionally perform well in the near term, but edgy market sentiment will likely put pressure on the stock prior to the impending general election. However, we feel that the fundamentals of Astro remain intact, and there is scope for more solid earnings growth going into 2013. We remain positive on Astro’s long-term industry positioning.

Relisting: Astro was previously listed on 29 October 2003 on the Main Board of the KLCI. In June 2010, it was privatized by Astro Holdings Sdn Bhd (AHSB) with the take-over price of RM4.30 per share, representing a 35.8 times of FY2010 PER and 2.1 time price to book value. The acquisition valued Astro at RM8.4b. Now, Astro is relisting its shares with an RM4.5b IPO, this values the ‘new’ Astro at an indicative market capitalization of RM15.2b, which represents an upward revision of 83% over the last two years.

What we liked:

1. Cross-selling initiatives with Maxis for HSBB and IPTV are starting to materialize and should contribute more going forward.
2. Market penetration rate for pay-TV services in Malaysia (50%) is still way behind the likes of South Korea, Hong Kong and Taiwan, and it is expected to breach the 60% level in 2013.
3. Astro has pure market dominance for having 99% market share of the domestic residential pay-TV market.
4. Well-established business brand with extremely high barrier to entry due to the high initial capex.

What we disliked:

1. Astro’s EBITDA margin to be 2-3% lower due to higher expected costs in the next 2-3 years.
2. During the reorganization of the company in FY2012, a net dividend of RM1.045bn has been distributed when the Net Profit is only RM629 mil, thus increasing its accumulated losses to RM730 mil.
3. The long term future of pay-TV services remain uncertain with the market moving into IPTV.
4. Expensive valuation coupled with unattractive yield (2-3%).

Company Background

Astro Malaysia Holding Berhad is one of the largest integrated consumer media entertainment group in Southeast Asia. As the leader of pay-TV industry in Malaysia, Astro commands a dominant share in the Malaysian residential pay-TV. The Group is principally engaged in the provision of TV services, radio services, creation, aggregation and distribution of content, publication and distribution of magazines and the provision of multimedia interactive services.

TV business
Astro is the largest pay-TV operator in Southeast Asia, with over 3.1 million residential pay-TV subscribers in Malaysia. The market penetration rate of pay-TV is approximately 50% of the Malaysian households while Astro owns a market share of 99% in the pay-TV market. The Group have developed content creation, aggregation, and distribution capabilities in ten major languages and dialects to cater to the interests of Malaysia’s three main ethnic groups. As at 30 June 2012, Astro broadcasts 156 TV channels, of which 68 are Astro-created and branded channels.

Radio business
Astro Radio broadcasts radio content through 20 different stations, nine of which are its commercial radio stations which are delivered as FM stations and broadcasted on its DTH satellite TV, IPTV, mobile and Internet platforms while the other 11 additional direct-to-user radio stations are broadcast only on its DTH satellite TV, IPTV, mobile and Internet platforms. Astro’s radio stations collectively reached approximately 13 million weekly radio listeners in April 2012, which translates into 52% market share in Malaysia.

Publishing business
Astro Publications publishes seven print magazines, including its TV viewing guide, AstroView, which is the most widely circulated magazine in Malaysia with a circulation of approximately 6 million in 2010. Astro’s other commercial publications include the English titles FourFourTwo, Style and FHM, the Malay-language title InTrend and the Chinese titles men’s uno and iFeel, with a combined circulation of 1.7 million in 2010.

Digital services business
Astro Digital develops and manages online and mobile portals to provide sports, entertainment and other key content to online audiences. These digital services allow Astro to expand its reach and to engage with customers and viewers by providing digital content such as latest news and sporting results, behind-thescene and special features, programme highlights and social integration.

Revenue Breakdown
In 2010, Astro generated a total revenue of RM 3107 mil. Its TV segment contributes to RM 2959 mil of Astro’s total revenue and RM106 mil from its Radio Segment, with a remaining RM 27 mil and RM 16 mil from its Publishing and Digital Services Segment respectively. A total of RM 3525 mil was generated in 2011, with its TV segment contributing to RM3372 mil of its total revenue and RM104 mil from its Radio segment. Astro’s Publishing and Digital Services segment contributed to RM 33 mil and RM 16 mil respectively. In 2012, Astro generated RM 3907 mil in revenues. RM 3759 mil from its TV Segment, RM 117 mil from its Radio Segment, and RM 28 mil from its Publishing segment with the remaining RM 3 mil from Astro’s Digital Services segment.

Investment Case

Key Value Drivers

Decent Dividend Play
Standing on top of the residential pay-TV market with pure dominance, Astro has been generating healthy cash flow. The Group registered RM1.41b of EBITDA in FY2012, which is an increase of 43.4% from the RM986.2m of EBITDA generated in year 2010. Mercury believes that Astro will fulfil its promised minimum 75% dividend payout policy.

Plenty of Upside at Current Penetration Rate
The total number of new subscribers have recorded a CAGR of 10% in the last 4 years, which saw household subscribers of pay-TV increased to 3.32 million 2011 from 2.27 million in 2007. The penetration rate for pay-TV services in Malaysia is still way behind the likes of South Korea, Hong Kong and Taiwan, and it is expected to breach the 60% level in 2013 as demand for pay-TV improves as a result of increasing consumer affluence. Besides, Astro has improved their customer retention by having a lower dropout rate at 8% this year, as compared to 11% in FY2011.

Higher ARPU
As consumers become more affluent, it is only natural for them to consider higher quality goods. Astro is already ready to provide High Definition (HD) services and is aggressively pushing it to improve their current Average Revenue per User (ARPU) RM83. Therefore, we expect Astro’s ARPU to trend upwards over the near term due to its HD offerings to existing customers. This is evident in the slight uptick in ARPU from RM82 in FY10 to RM89 in FY12, as Astro’s HD subscriber numbers grew from 24k in FY10 to 772k in FY12. To recap, a subscriber would have to pay an additional RM20 per month for HD services and an extra RM10 per month for Personal Video Recording.

Key Risks

Rising Costs
In a bid to upgrade its services, it is expected to incur higher costs in the next 2-3 years as Astro plans to improve its customer relationship management (CRM) system as well as replace the new HD set-top boxes for its customers. It is understood that these technical upgrades will narrow Astro’s margins, but the management has given the assurance EBITDA margin will hover at the region of 23-28% for the next 2-3 years, which is in line with Mercury’s projection.

Moving forward; HSBB and IPTV
The management has recognized that going forward, Internet Protocol Television (IPTV) coupled with the service of High-Speed Broadband (HSBB) will be the future of the domestic residential pay-TV market. Hence, it is collaborating with Time dot Com Bhd and its sister company, Maxis, to provide a bundled service of HSBB and IPTV to complement its existing pay-TV services. This is their pre-emptive response to burgeoning competitors such as TM’s HyppTV and YTL Communications’ offerings. This remains an unknown territory and many more players could join the party. This poses potential risks to Astro’s future earnings when the market becomes more receptive of IPTV.

Financial Highlights

Business Performance on top of its game
During the reorganization by its parent company, AMH’s Pay TV subscribers CAGR stood at 2.3% from FY2010-FY2012, a notable increase from RM2930mil to RM3067mil. AMH has managed to increase its residential pay TV ARPU with its HD offerings, which has jumped from RM82 to RM91. All these have contributed to the growth of the revenue, which was at a CAGR of 9.5% from RM3242mil to RM3889mil since AMH was taken private. Due to the rigorous cost saving measures imposed, EBITDA has grown at a CAGR of 19.8% from RM986mil in year 2010 to RM1415mil in year 2012.

Larger Accumulated Losses
Astro paid out more than RM1bil as dividend in 2012, even though the reported net profit before other comprehensive income is only RM634mil. Hence, has caused a larger accumulated losses in 2012 (RM730mil) even the company recorded a profit in past 3 years.

Rising Costs to trim EBITDA margin
The management has provided a guidance that the EBITDA margin will drop 2-3% in next two years from current level of 36% due to the higher installation, marketing, and distribution costs due to the higher customer acquisition & B.yond STB Conversions. The EBITDA margin is expected to rebound to the current level in year 2015 onwards.

Higher Depreciation and Other Charges
The net margin compressed and dropped from 18.9% in 2010 to 10.7% in 1H2013 due to the higher finance cost, unrealized forex losses, higher effective tax rate, and accelerating depreciation from astro B.yond STB.

High Debt Level
Prior to the IPO, Astro’s total debt is recorded at RM4284mil. The breakdown of the Total Borrowing of RM4284mil is RM1040mil, RM2510mil, and RM734mil for finance lease, term loan in ringgit and term loan in USD respectively. Nonetheless, part of the IPO proceeds (RM500mil) will be used to pay down the debts.

Assumptions of the DDM:-

Bull Case

• New subscriber grow at 4%, 1.5% higher than its CAGR of 2.5% in last three years.
• Benefited from the higher conversion rates of the existing subscribers into HD services, the ARPU grow at 7.5%, 2.5% higher than its historical growth rate of 5%
• Pay out 85% of its profit as dividend.
• 3% perpetual growth

Base Case

• New subscriber grow at 2.5%
• ARPU’s growth rates stagnant, on par with its CAGR of 5%.
• Pay out 80% of its profit as dividend.
• 2.5% perpetual growth

Bear Case

• Slower than expected new subscriber growth.
• ARPU growth stagnant due to the pricing competition triggered by other IPTV service providers.
• Pay out 75% of its profit as dividend.
• 2% perpetual growth

Source: Mercury Securities Research - 19 Oct 2012