According to media reports, Malaysia’s dominant pay-TV operator, Astro is slated to relist by end-September. Astro was taken private in June 2010 at RM4.30 per share, which valued the company at RM8.5bn on a PE of 34x. We believe Astro’s valuation this time round could come in lower due to: (i) decelerating pay-tv subscriber growth, (ii) escalating content cost, especially the broadcasting rights for sports programmes, and (iii) competition from new pay-TV entrants such as Asia Broadcasting Network (ABN), TM and Maxis. We project Astro’s go-to- market valuation to be in the range of 16x-18x PER (in line with global and regional pay-TV comparables), translating into a market cap of RM5.6bn-RM6.3bn. The re-listing should drive a re-rating of the media sector given its profile and size.
Returning without the excess baggage? Given Maxis’ relisting in late 2009 sans its loss-making overseas business, we believe the major shareholders and promoters of Astro might engineer a similar comeback for Astro on the local bourse. As Astro has had its share of trials and tribulations in the past, notably its failed JV in Indonesia which led to the group writing off RM1.16bn, we believe there is a high possibility the relisting of Astro would be without its 20% stake in loss-making SunDirect TV to stem the dilution to earnings and ease the strain on its cash flow. Based on our back of the envelope calculations, the Malaysian operation could potentially generate earnings of RM348m in FY13 based on an assumed household base of 3.7m, ARPU of RM120 per month and EBITDA margin of 20%. Ascribing a forward PE multiple of 16-18x in line with regional and global peers, Astro’s potential go-to-market equity valuation could range from RM5.6bn-RM6.3bn. If we were to exclude its overseas operation, Astro is actually a cash cow, chalking up EBITDA of RM800m-RM1bn per year and thereby could be positioned as a dividend play.
Rising competition and surging content cost. Since its incorporation in 1996, Astro has had a rather colourful corporate journey dotted by its fair share of excitement and disappointment. As the dominant pay-TV operator, the group expanded pay-TV household penetration from a mere 7% in 2000 to 49% in 2011. That said, we foresee risks that could impede its growth moving forward: (i) the emergence of other pay-TV operators in the form of a cable operator and few IPTV players which could pose a strong challenge to Astro (ii) escalating cost of content, especially for sports programmes such as the popular Barclays Premier League (BPL) and (iii) slowing subscriber growth, projected at mid single-digit level going forward.
Sector re-rating likely. We think the relisting of Astro would drive a re-rating for the media sector as the company is likely to emerge as the largest media stock by market capitalization. Although Astro’s longer-term prospects appear to be less attractive, we think the company may be positioned as a dividend play with its highly cash generative local pay-tv business. We see Media Prima (BUY, FV RM2.98) benefiting most from the sector re-rating, being the closest peer to Astro. Media Prima is currently the largest free-to-air (FTA) TV operator in the country commanding the lion share of viewership at 48% followed by Astro with a 39% share. On the back of the healthy adex growth spurred by the recent Euro 2012, the upcoming 2012 Olympics and the impending general elections, we retain our overweight call on the sector. We also think Media Prima’s FTA TV segment to register strong double digit growth in adex, likely at the range of 30%-35% q-o-q in 2QFY12.
A key pay-TV operator. Astro, launched in 1996, is Malaysia’s leading integrated cross media group with operations in four key businesses, namely Pay TV, Radio, Content and Digital. It had 3.1m subscribers and a 49% household penetration rate in Malaysia as of Dec 2011, making it a key pay-TV operator in Southeast Asia. Broadcasting more than 153 channels, Astro is also the leading distributor of original multi-language content of various genres across multi-channels. Its radio network, both terrestrial and digital, covers all key languages, cumulatively reaching 13 million weekly listeners, with three of its channels ranked among the top 10 stations in the country. Given its innovation and expansion into providing HD, 3D and PVR (Personal Video Recorder) services, we think Astro has established a strong presence over the past decade.
Stronger growth back then. Astro is best known for its two programme packages – the Astro SuperSports and Astro Wah Lai Toi. Astro SuperSports broadcasts a variety of sports events including the prominent BPL, the Olympics, F1, UEFA Europa League, Badminton: the BWF Premium Super Series, and other prestigious international sporting events. Wah Lai Toi, meanwhile, broadcasts Chinese TV series, programmes and game shows. Astro also broadcasts Malay programmes and series under the Astro Awani package to capture the Malay market. We gather that these prominent programmes have successfully attracted Malaysian households and subscriber rates have expanded at a strong CAGR of 12% since its listing through 2011. However, with 3.1m subscribers already in hand as at end-2011 and given that Malaysia currently has only 6.5m households, we believe Astro’s pay TV subscription growth might decelerate due to fresh competition from IPTV providers and ABN. We are projecting the annual growth rate to stabilize at the mid-single digit level. (Please see Figure 1.)
Overseas ventures faced setbacks. While it was listed, the performance of Astro shares, as shown in Figure 2, had been lackluster due to the concerns over the protracted legal issues it faced in Indonesia and its loss-making overseas investments. There were several reasons behind the group’s suppressed share price. We think that investors were somehow disappointed with its failed venture in Indonesia, as well as the various hiccups it encountered in venturing into India. Although there was plenty of growth potential in the two countries, penetrating these markets was not as easy as anticipated owing to overseas jurisdiction risks such as unexpected changes in regulations, and their licensing, taxation and currency repatriation policies.
Profit margins thin, but expect ARPU to improve. Meanwhile, the escalating content costs vis-à-vis its TV revenue growth, especially the broadcasting rights for sports programmes, have led to erosion in its profit margins. In order to grow its subscriber base, Astro actually had to absorb most of the content cost increases over the years since 2004. (Please see Figures 3 and 4.) Nevertheless, we expect the group’s ARPU to improve going forward, bolstered by its HD and PVR services. The group’s HD service provides viewers with crystal clear details and cinematic surround-sound, attracting thousands of football fans. Meanwhile, its PVR services have enabled viewers, especially working adults, to record their favourite programmes for replay after working hours.Indonesia JV tanks. Astro’s venture into Indonesia was bogged down by higher than expected start-up losses, expensive intellectual property rights and broadcasting equipment, as well as the 18-month legal battle with the LIPPO group. To recap, Astro formed a joint venture (JV) with LIPPO Group’s PTDV to set up a Direct-to-Home pay TV business in Indonesia with a 20:80 equity ratio. It poured hundreds of millions of ringgit into the business at LIPPO’s request but was unable to finalize an agreement with the latter for its 20% stake in PTDV. Subsequently, on 20 Oct 2008, Astro terminated the supply of services and support to PTDV, leading to the group writing down a total of RM1.16bn as provisions. Pursuant to the dispute, on Feb 2009, Astro commenced arbitration proceedings in Singapore. (Please see Table 1 on the chronology of events leading to Astro’s failed partnership with PTDV)
SunDirect TV still loss-making. It is the same fate for Astro’s venture to India, through which it has a 20% stake in SunDirect TV, with the balance 80% controlled by the Sun Group, one of the largest media and entertainment groups in India. Despite being the largest Direct-to-Home Pay TV with 5m household subscribers in India, the group has yet to report a profit from the venture due to the huge capex and start-up costs. As of FY10, SunDirect TV reported core losses of RM100m p.a.
Returning to the bourse after 2010 privatization. Astro’s dark days and the unfortunate developments which had kept its share price depressed – hence prompting its major shareholder to take the group private - are now behind it. The group was taken private on 14 June 2010 by Astro Holdings (AH), which held 72.91% of the company’s shares prior to the exercise. At the privatization price of RM4.30 per share, the share was pegged at a 30x 1-year forward PER and 9x EV/EBITDA. Going by what the promoters have achieved with the relisting of Maxis, we believe that Astro will definitely make a big comeback to the local bourse. Note that when Maxis was re-floated on 29 Oct 2009, it did so without its loss-making overseas operation. As such, we think that there is a high possibility of Astro excluding its 20% equity interest in the loss-making SunDirect TV prior to the re-listing.
Ruling on sharing content may hurt Astro. Some of the other risks we highlighted earlier were the threat of margins erosion, unexciting subscriber growth, and the emergence of other pay-TV service providers such as ABN and TM offering consumers options other than Astro packages. We see a major setback in the new MCMC ruling, announced on 19 April 2012 and which took effect on 1 May 2012, stating that all FTA TV operators can broadcast content obtained by the sole rights holder, based on reasonable commercial terms. The ruling, which applies to all sports events of national significance including the Olympics, Commonwealth Games, Asian Games, SEA Games, SUKMA, and badminton and football tournaments, stipulates that the broadcasting rights to these events would have to be shared on reasonable commercial terms. Some of the key sports content currently exclusive to Astro are broadcasting rights to the BPL and FIFA World Cup. The new ruling effectively robs Astro of its exclusivity to those rights, rendering some of the content less appealing since viewers can watch them on FTA TV channels owned by Media Prima. We gather that the bidding for the broadcasting rights to the next season of BPL is expected to start in 3Q2012.
Sector re-rating in store. Should Astro make a comeback to the local bourse, we believe it will spark off a major re-rating of the Media sector given that the group could emerge as the largest Media stock in Malaysia with an estimated market capitalization of RM6bn-RM7bn. Although Astro’s potential growth will not be that exciting, we nonetheless think it will be a cash cow and thus pay good dividends. We see Media Prima (BUY, FV RM2.98) as the likeliest candidate for a potential upward rerating since it is Astro’s closest peer. Given its success in segmentizing viewers by demographics and its focus on content creation, the group is currently the single largest TV operator in Malaysia in terms of viewership, with its four core free-to-air (FTA) TV channels commanding a 48% share, followed by Astro with a 39% share of viewership.
Company Development
MEDIA PRIMA (PRICE: RM2.35, BUY, FV: RM2.98)
We continue to like Media Prima, considering that it is Malaysia’s largest integrated media player and which dominates the nation’s FTA TV segment as well as controls a strong print media business led by Harian Metro and Berita Harian. We believe the group will announce positive 2QFY12 results reflecting healthy single digit growth in one month’s time, buoyed by a surge in adex in its FTA TV segment in 2QCY12 vis-à-vis 1QCY12, thanks to the Euro Cup 2012 in June. We also gather that its newspaper segment, led by flagship Harian Metro, continues to register strong adex. We see the MCMC ruling on sharing content potentially spurring adex for the group’s FTA TV segment going forward. Maintain BUY, with a FV of RM2.98, based on 16x FY12 PER. Media Prima is currently trading at an attractive 12x FY12 PER. Should Astro relist on the local bourse, we believe Media Prima shares will be in for a re-rating. Furthermore, we do not see Astro’s relisting posing a huge threat to MPR noting that the two TV operators has different target of customers. Astro’s customers are the niche advertisers, selling high-end products such as BMW, Mercedes, Louis Vuitton, Tag Heuer, and so forth while MPR’s clientele base are mostly the FMCG companies, telco, financials and E&E companies. We also believe adex for its TV segment to pick up strongly on 2Q, which we believe to improve by 30%-40% q-o-q.
MEDIA CHINESE (PRICE: RM1.51, BUY, FV RM1.86)
We are maintaining our BUY call on Media Chinese, in light of management’s prudent cost controls as well as healthy adex growth anticipated for CY12, boosted by a slew of upcoming major sports events. Owing to its huge cash pile, the group has never failed to reward its shareholders with lucrative dividends. Still, we were caught by surprise when the company proposed two days ago to pay dividends amounting to RM700m, or RM0.41 per share to shareholders. Out of this sum, RM500m is to be financed by bank borrowings. While we note that MCIL will no longer be a cash cow after the huge payout, especially since it would have to service interest on this loan amounting to RM30m a year going forward, based on an interest rate of 6% p.a. Nonetheless, we still maintain our BUY call for now, considering the group’s capability to settle the debt interest as well as pay out a dividend based on a payout ratio of 60%, assuming that it does not take on any major capex in the next 3 to 4 years. Note that MCIL has a strong free cash flow of approximately RM60m per quarter. We continue to like the group’s growing readership and circulation, considering the growth of the country’s Chinese-literate population and the increasing importance of the language in the global arena. We also expect the group’s 1QFY13 results to be in line with our expectations. Maintain BUY, with cum-FV of RM1.86, based on an unchanged 13x on FY13 PER.
STAR PUBLICATIONS (PRICE: RM3.18, NEUTRAL, FV RM3.33)
We are maintaining our NEUTRAL call on STAR Publications in view of its dwindling adex share and the saturation in its advertising space. Nonetheless, we will revise our earnings projections going forward should the readership and circulation of its flagship newspaper improve. We believe that this year’s adex will be healthy, spurred by the upcoming global sports events and the highly-anticipated General Election, which may be held in 2HFY12.
CATCHA MEDIA (PRICE: RM0.61, BUY, FV RM1.03)
Within the small-mid cap space, we favour internet media group Catcha Media. We are positive on the company’s maiden foray into the regional auto market via the setting up of a regional car web portal catering to the booming auto industry. To recap, Catcha recently announced that it is disposing of its 50%-owned car web portal, Auto Discount, to a newly-set up company in Australia, iCar Asia, which would list on the Australia Stock Exchange by 30 June 2013. As we highlighted in our 5 July 2012 report, “iCar Comes On Board”, online classified advertising websites are generally divided into three main categories, namely jobs, property and cars. In the ASEAN region, Jobstreet and iProperty are well-established in the jobs and property classifieds categories respectively. The classified space for cars is the only online classified space that remains unconsolidated throughout the region. iCar intends to strengthen its existing online car classifieds websites in Malaysia, as well as in the booming auto markets of Indonesia and Thailand. We are positive of the company’s growth going forward. Similar to Catcha’s sister company, iProperty, we expect iCar’s revenue to grow at a CAGR of at least 150% over the next four to five years and become profitable by 2015. We also expect its e-commerce business, Haute Avenue, to blossom going forward, capitalizing on its healthy membership growth and the growing trend in internet shopping among Malaysians, especially young working adults. There are no changes to our estimates for now, pending more details on iCar’s financials. We maintain our BUY call, at an unchanged FV of RM1.03, based on a 12x FY12 PER.
Source: OSK
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