Astro Malaysia Holdings (AMH) is poised to list on Bursa’s Main Market on 19 Oct with a market cap of RM15.6bn. The largest pay-TV operator in Malaysia has a de factomonopoly, commanding a 99% market share. While its IPO valuation may not appear cheap initially, there is upside potential given: i) the existing low pay-TV penetration of 46%, ii) a potential uptick in ARPU as subscribers migrate to the HD platform, iii) its content superiority, and iv) the high entry barriers to the pay-TV industry due to the high capex. We recommend that investors SUBSRIBE for AMH’s IPO at our FCFF-based FV of RM3.37 (WACC: 8.45%, TG: 1.5%).
Background. AMH is the largest pay-TV operator in Malaysia with 3.1m customers on board. Its closest competitor, Hypp TV, trails far behind with a <1% share of the pay-TV market. Currently, AMH broadcasts its content through three distribution channels: Direct-To-Home (DTH) satellite TV, Internet Protocol TV (IPTV) and Over-The-Top (OTT) service to deliver content directly to technology devices over broadband.
Domestic arm of previously-listed AAAN. To put things in perspective, AMH is effectively Astro All Asia Networks’ (AAAN) media business arm in Malaysia. Recall that AAAN was taken private in 2010 by its single largest shareholder Astro Holdings SB. The takeover offer of RM4.30 per share translated into a P/BV of 9.3x, PE of 35.7x, or equivalent to an EV/EBITDA of 11.2x based on AAAN’s FY10 financials.
Pay-TV penetration to improve. We see a large untapped potential in take-up by existing households as AMH’s pay-TV penetration rate now stands only at 46%. Management is in the midst of introducing more variety such as HD content, IPTV, prepaid packages and triple-play offerings to better meet the needs of its target customers. This targeted approach would help AMH penetrate into the currently-untapped 3.5m households, a majority of which are in the underserved Malay market. We expect the penetration rate to hit 50% by FY15.
Monetising existing subscriber base. Meanwhile, management is looking to migrate its existing subscribers to the HD-enabled platform to enhance ARPU. An initial deadline of 2014 has been set to convert most of its legacy Set Top Boxes (STBs) to the HD-enabled Astro B.yond STBs. Given the increasing sales of HD-ready TV sets, which we found accounted for 90% of new TV purchases, we believe the target is achievable. For our model, we are forecasting an ARPU uplift of 6% from FY13-FY15.
SUBSCRIBE. We derive an FV of RM3.37 (WACC: 8.45%, TG: 1.5%) for AMH, implying a valuation of 43x FY14 PE and 12.7x FY14 EV/EBITDA. This is justifiable as: i) AMH is the largest pay-TV operator in Malaysia, ii) there are high barriers of entry to the pay-TV industry, and iii) it has a superior content. Thus, with a 12.3% upside, we are recommending investors to SUBSCRIBE for the IPO.
Background. AMH is the largest pay-TV operator in Malaysia with 3.1m customers on board. Its closest competitor, Hypp TV, trails far behind with a <1% share of the pay-TV market. Currently, AMH broadcasts its content through three distribution channels: Direct-To-Home (DTH) satellite TV, Internet Protocol TV (IPTV) and Over-The-Top (OTT) service to deliver content directly to technology devices over broadband.
Domestic arm of previously-listed AAAN. To put things in perspective, AMH is effectively Astro All Asia Networks’ (AAAN) media business arm in Malaysia. Recall that AAAN was taken private in 2010 by its single largest shareholder Astro Holdings SB. The takeover offer of RM4.30 per share translated into a P/BV of 9.3x, PE of 35.7x, or equivalent to an EV/EBITDA of 11.2x based on AAAN’s FY10 financials.
Pay-TV penetration to improve. We see a large untapped potential in take-up by existing households as AMH’s pay-TV penetration rate now stands only at 46%. Management is in the midst of introducing more variety such as HD content, IPTV, prepaid packages and triple-play offerings to better meet the needs of its target customers. This targeted approach would help AMH penetrate into the currently-untapped 3.5m households, a majority of which are in the underserved Malay market. We expect the penetration rate to hit 50% by FY15.
Monetising existing subscriber base. Meanwhile, management is looking to migrate its existing subscribers to the HD-enabled platform to enhance ARPU. An initial deadline of 2014 has been set to convert most of its legacy Set Top Boxes (STBs) to the HD-enabled Astro B.yond STBs. Given the increasing sales of HD-ready TV sets, which we found accounted for 90% of new TV purchases, we believe the target is achievable. For our model, we are forecasting an ARPU uplift of 6% from FY13-FY15.
SUBSCRIBE. We derive an FV of RM3.37 (WACC: 8.45%, TG: 1.5%) for AMH, implying a valuation of 43x FY14 PE and 12.7x FY14 EV/EBITDA. This is justifiable as: i) AMH is the largest pay-TV operator in Malaysia, ii) there are high barriers of entry to the pay-TV industry, and iii) it has a superior content. Thus, with a 12.3% upside, we are recommending investors to SUBSCRIBE for the IPO.
COMPANY BACKGROUND
Malaysia’s largest pay-TV operator. AMH is the largest pay-TV operator in Malaysia. With 3.1m residentialcustomers on board, it enjoys the privilege of having a de facto monopoly over Malaysia’s pay-TV space, commanding a market share of over 99%. Its sole competitor at this point of time, Telekom Malaysia’s (TM) Hypp TV, has the remaining 1% share. Currently, AMH hosts 156 TV channels, of which 68 are self-created and branded. These channels are distributed via three methods: Direct-To-Home (DTH) satellite TV, Internet Protocol TV (IPTV) and Over-The-Top (OTT) service to deliver content directly to technology devices overbroadband.
Exclusive licence until 2017. AMH first secured the broadcasting license to provide DTH satellite TV services in Malaysia in 1997 for a 25-year tenure. Under the licensing agreement, it is granted exclusivity until 2017. Over the years, the group launched various packages which include Astro On Demand and Astro First, both being its video-on-demand packages. In 2009, it launched Astro B.yond, a hybrid DTH satellite TV and broadband-enabled Set Top Box (STB) to provide High Definition (HD) broadcasting services. Subsequently in 2011, the group partnered TIME dotcom (TDC) to deliver its pay-TV services through TDC’s fibre optic broadband, marking its maiden entry into the IPTV space. On top of that, AMH is now working with Maxis to offer its Astro B.yond IPTV services through the latter’s extensive fibre network coverage. On a side note, it also launched its first-of-its-kind NJOI package, a non-subscription based DTH satellite TV service, back in February.
A presence in radio and publications too. On top of that, AMH is also involved in the radio and publication businesses, although both segments are relatively insignificant compared to its TV segment, jointly contributing 7.2% to the group’s consolidated topline. Its radio division comprises nine commercial and 11 direct-to-user stations covering all four major languages in Malaysia – English, Malay, Chinese and Indian. According to Nielsen Media, AMH captures 13m weekly listeners with a 52% share of listenership in Malaysia. Meanwhile, its publication arm carries seven titles with a combined circulation of approximately 1.7m as of 2010.
Management team spearheaded by Dato’ Rohana. AMH’s management team is led by CEO Dato’ Rohana Tan Sri Datuk Rozhan, who has been with AMH and AMH-related entities since 1995. According to the company’s prospectus, Dato’ Rohana will be rewarded with RM19.5m worth of AMH shares vested over the next five years as a token of appreciation for successfully taking the company public.
IPO details. AMH’s proposed IPO exercise involves the issuance of 474.3m new shares and sale of 1,044.0m existing shares held by its single largest shareholder Astro Holdings SB. At the indicative IPO price of RM3.00/share, this could potentially raise RM1,422.9m, the bulk of which will be utilised to repay bank borrowings as well as for future capex, which involves pushing out its B.yond STBs to more households. The company would be officially listed on Bursa on 19 Oct.
Overseas operations stripped off. To put things into perspective, AMH is effectively Astro All Asia Networks’ (AAAN) media business arm in Malaysia. AAAN was listed on Bursa in 2003 but in 2010, its single largest shareholder Astro Holdings SB proposed to take private the entire company at RM4.30/share. The pegged valuation translated into a P/BV of 9.3x, PE of 35.7x, or equivalent to an EV/EBITDA of 11.2x based on AAAN’s FY10 financials. Subsequently, AAAN was delisted from the Main Market in June 2010.
Shareholding structure post-IPO. Post-listing, Astro Networks (Malaysia) would remain as the single largest shareholder of AMH, holding a 70.8% stake in its enlarged share capital. A moratorium is set at six months after the listing. According to the prospectus, 22 cornerstone investors have been secured thus far. Some of the more prominent names include Great Eastern Life Assurance, PNB, Caprice Capital International which is controlled by Tan Sri Quek Leng Chan, Kencana Capital, Tan Sri Chua Ma Yu, and Corston-Smith Asset Management. From our understanding, there is no moratorium set on invested amount for the first USD15m and a 3-month moratorium for any invested amount beyond the first USD15m.
FINANCIALS
Revenue driven by pay-TV. AMH’s topline chalked up a decent CAGR of 9.5% over the last three FYs, driven by its pay-TV segment which grew 9.0% p.a. over the period. We attribute this to its enlarged subscriber base, which grew from 2.9m in FY10 to 3.1m as of FY12, coupled with the up-selling of its existing offerings to monetise on higher ARPU. This is evident in the slight uptick in ARPU from RM82 in FY10 to RM89 in FY12, as AMH’s HD subscriber numbers grew from 24k in FY10 to 772k in FY12.
Improved EBITDA... By the same token, EBITDA closed FY12 at a high of RM1,414.7m, partly driven by lower operating expenditures due to the reduction in the deployment of Standard Definition (SD) STBs following the introduction of Astro B.yond STBs. The costs of the Astro B.yond STBs are capitalised and depreciated over their economic useful life of three years, as opposed to SD STBs which are typically expensed out upon installation. The EBITDA margin, however, eased 100bps from FY11 to close at 36.4% owing to higher administrative expenses.
...but EBIT dented by higher depreciation charges. That said, FY12 EBIT closed 7.2% lower y-o-y at RM990.4m with a corresponding 360bps decline in margin as the rolling out of HD STBs triggered an increase in AMH’s depreciation expenses, which in turn jumped by 40.3% over the period. This was also partly due to the marginal increase in subscriber acquisition costs, which went up from RM630 in FY11 to RM636 in FY12 as the group stepped up its marketing campaign to entice customers’ take-up of its HD packages.
Profitability dented by rising financing costs. Higher financing costs, which escalated >100% y-o-y to RM194.7m following the drawdown of RM3,004.6m in borrowings in FY12 ate into profitability, with FY12 net profit closing 24.2% lower y-o-y at RM624.1m. The financing undertaken was part of AAAN’s restructuring scheme to consolidate its Malaysia’s broadcasting business under AMH.
Net gearing at 6.7x. Based on AMH’s pro-forma accounts, its cash balance stood at RM478.2m, with total borrowings of RM3,709.9m as of January 2012. This translates into a net gearing of over 6.7x, which seems high at first glance. If we were to include the IPO proceeds, however, AMH’s net gearing would drop to an estimated 0.9x, which we believe should not pose significant liquidity issues given the strong cash flow generation nature of the business with receivable days of approximately 70 days.
Beefing up satellite capacity. AMH is currently operating on two satellites, namely the MEASAT-3 and MEASAT-3A which began commercial operations in February 2007 and July 2009 respectively. These satellites have a life expectancy of 15 years, with operations to cease by 2021 and 2024 respectively. Based on AMH’s contracted capacity of 11 and six Ku-band transponders on the respective satellites, the group has the capacity to broadcast up to 179 TV channels, including 36 HD channels, over its DTH satellite platform. For future expansion, AMH have agreed to lease an additional 18 Ku-band transponders on MEASAT-3B for a total of USD538m. The satellite is expected to be launch in 2014. This will push up its capacity to 180 SD and 102 HD channels.
CATALYSTS
Plenty of upside at current penetration rate. Though Malaysia’s population is likely to grow at low single digits of 1.5%-2.0% p.a., we see plenty untapped potential in the existing households given that AMH’s pay-TV penetration rate nw stands only at 46%. Leveraging on its multi-pronged approach by customising its packages to meet its target customers’ different requirements, AMH now offers a variety of products from NJOI prepaid services, post-paid packages, video-on-demand on Astro-On-Demand and Astro First to its triple-play IPTV service in partnership with TDC and Maxis. We believe this targeted approach will help AMH to penetrate into the currently-untapped 3.5m households, a large portion of which are in the underserved Malay market.
The most underserved segment. We believe AMH’s latest pay-TV package NJOI could help it penetrate into the most underserved Malay segment, which registered the lowest viewership rating of 61% as of FY12, according to its data compilation. Targeted at lower-income households, this product offer subscribers the flexibility of purchasing prepaid content, albeit at a slight premium relative to normal post-paid packages. As a majority of the Malay population is centred in rural areas, which typically have lower income per capita, this strategy could help AMH improve its penetration into the Malay pay-TV market. Moreover, the group has been ramping up its in-house content creation to better attract viewers’ interests. For instance, its in-house programs Akademi Fantasia and Raja Lawak are among the most viewed shows with peak viewers of >1m . While ARPU may experience some downward pressure from these lower-commitment packages, we believe the potential increment in its subscribers’ base could more than offset the potential negative impact by expanding AMH’s target market reach and hence, expand its earnings base in the long run.
Tie-ups with Maxis and TDC could prove fruitful. To enlarge its footprint in the IPTV space, AMH has partnered with TDC and Maxis to deliver its pay-TV services through the duo’s fibre optic network. This would increase its IPTV distribution reach to over 1.3m households by the end of this year. According to the proposed 10-year arrangement with Maxis, the telco company would become the exclusive fibre network partner for AMH excluding the areas within TDC’s fibre footprint. While we believe take-ups for its IPTV service would likely remain insignificant over the immediate term, this is as a good start as the IPTV platform offers a cheaper and more efficient alternative to broadcast its content than the conventional satellite method and thereby capitalise on the growing fibre backhaul that the telcos have invested in. Offering triple-play packages by bundling broadband, voice and IPTV services could stir new interest as it is a one-stop-for-all value proposition to consumers. On a side note, IPTV could also help to eliminate the issue of rain-fade i.e. satellite signal interruptions during heavy downpours.
ARPU to tick up. Meanwhile, we also expect AMH’s ARPU to trend upwards over the near term due to the up-selling of its HD offerings to existing customers. 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. We believe this could help to mitigate the potential downward pressure on ARPU from the launching of its prepaid NJOI package and to sustain its ARPU growth at 2%-3% over the next three years.
Adex share could catch up. Although AMH commands 39% in terms of TV viewership, its share of adex trailed at 26% of the total national adex. We attribute this to its below-average viewership among the Malay segment, which most likely kept advertisers away. With the launching of NJOI and hence the potential penetration into the Malay TV viewers market, this may potentially lift its TV adex income, which was at RM251.5m as of FY12. Assuming AMH’s share of TV adex goes on par with its viewership at 39%, this could potentially boost its core earnings by RM150m-RM200m p.a.
VALUATION & RECOMMENDATION
Key assumptions to our financial forecast. Notable takeaways from AMH’s 1HFY13 financial results were:
i) revenue grew by 13% y-o-y on the back of higher ARPU and rising pay-TV subscription, ii) rising content cost, license fees, marketing and distribution expenses crimped the EBITDA margin by 630bps, and iii) the bottom-line fell sharply by 41% y-o-y owing to higher finance costs. With that, we are forecasting AMH’s FY13-FY15 revenue to grow at a CAGR of 8.4% as its pay-TV subscriber base is expected to increase by 530k during the period. We are also projecting an incremental ARPU of RM5.60 given the higher take-up for its premium HD services. On the other hand, its core PATAMI is expected to decline this year (-36% y-o-y), observing the hike in depreciation and amortisation charges along with higher marketing expenses; this is a spill over effect from FY12, as AMH had already been aggressively rolling out the installation of their HD STBs. Moving forward, the company’s bottom-line is poised to resume its growth projection after front-loading most of these costs in FY12-FY13.
i) revenue grew by 13% y-o-y on the back of higher ARPU and rising pay-TV subscription, ii) rising content cost, license fees, marketing and distribution expenses crimped the EBITDA margin by 630bps, and iii) the bottom-line fell sharply by 41% y-o-y owing to higher finance costs. With that, we are forecasting AMH’s FY13-FY15 revenue to grow at a CAGR of 8.4% as its pay-TV subscriber base is expected to increase by 530k during the period. We are also projecting an incremental ARPU of RM5.60 given the higher take-up for its premium HD services. On the other hand, its core PATAMI is expected to decline this year (-36% y-o-y), observing the hike in depreciation and amortisation charges along with higher marketing expenses; this is a spill over effect from FY12, as AMH had already been aggressively rolling out the installation of their HD STBs. Moving forward, the company’s bottom-line is poised to resume its growth projection after front-loading most of these costs in FY12-FY13.
We understand in FY15, AMH has agreed to lease 18 Ku-band transponders on MEASAT-3B for a total of RM1,614m (USD538m) in order to increase its broadcasting capacity to 180 SD and 102 HD channels. As a result, we have incorporated higher capex spending in our financial model. We have also assumed higher ARPU and pay-TV penetration in FY15 to reflect a higher take-up for HD services.
Targeting 75% payout. AMH targets to pay out at least 75% of its net earnings starting from FY13. Although this translates into an unexciting yield of 1.9% p.a. based on our assumptions, we see potential for more post-FY15, after the group finalises the migration from SD STBs to HD STBs. Based on our calculations, AMH could pay out up to 6.4sen p.a. based on normalised earnings of RM446.7m p.a. after it completes its STB migration and procures more satellite transponder capacity from MEASAT-3B.
SUBSCRIBE, with a 12.3% upside. We derive a FV of RM3.37 for AMH, using the FCFF methodology (WACC: 8.45%, TG: 1.5%), implying 43x FY14 PE and 12.7x FY14 EV/EBITDA. We justify the valuation based on the fact that AMH: i) is the largest pay-TV operator in Malaysia, commanding the lion’s share of over 99%, ii) has economies of scale and a de facto monopoly over Malaysia’s pay-TV market, which create significant barriers to entry, and iii) has superior content spread over 156 TV channels, of which 68 are self-created and branded. Thus, in view of the 12.3% upside, we are recommending investors to SUBSCRIBE for the IPO.
RISKS
Hypp could live up to the hype. At this juncture, TM’s Hypp TV is AMH’s sole competitor. Hypp TV is an IPTV service launched in conjunction with TM’s fibre optic service named Unifi. To recap, every Unifi subscriber is entitled to a free Hypp TV subscription, accessing 19 free channels in its basic package. These subscribers can opt for the premium packages, with a certain monthly commitment. As of 2QCY12, Unifi has 384k subscribers; less than a fifth of these are currently on regular subscriptions for Hypp TV. While we do not expect TM’s offerings to threaten AMH’s products in the near term, we do not discount the possibility of a potential price war as Unifi is targeted to be taken up in 1.3m homes by the end of 2012.
More competition likely. On top of that, we are expecting more players to emerge within the pay-TV universe over the next three to five years. For instance, the Datuk Kenneth Eswaran-led Asia Broadcasting Network has announced plans to launch a cable service as early as 1HCY13. There is talk that the group is looking to allocate some RM2bn in capex to ramp up its operations. On top of that, five other competitors have obtained licences to provide pay-TV services, although none are currently active.
Proliferation of illegal satellite dishes. On the other hand, we noticed that the installation of illegal satellite dishes have become increasingly prevalent especially in the rural areas. We understand that these devices typically cost around RM200-RM300 with no monthly commitments upon installation. Depending on the variants, some users claimed to be able to receive as much as 300 channels. Given the much cheaper price point, this could potentially impede AMH’s subscribers’ growth unless proper enforcement is in place.
IPTV-enabled STBs picking up, too. Other than that, we also noticed a lot of IPTV-enabled STBs currently being sold in the legal market. These devices, typically manufactured in China, cost between RM300-RM400 and do not require monthly subscriptions for channel viewing. Users connect the STB to a high-speed modem preferably with a broadband speed of >4Mbps, and to a TV set to enable video streaming. The device usually comes bundled with set of IP addresses which enables reception of channels in different countries. Given the much cheaper price point and coupled with the fact that it is legal, this could potentially impede AMH’s
subscribers’ growth going forward.
subscribers’ growth going forward.
DTT could signal new competition. Malaysian Communications and Multimedia Commission, Malaysia’s regulator of the multimedia industry, earlier called for a tender for the deployment of Digital Terrestrial Television (DTT) infrastructure following the proposal for an analogue switch-off by 2015. The tender is to appoint a single entity to build the DTT infrastructure, and subsequently lease it out to TV broadcasters. With the deployment expected to commence as soon as end-2013, RTM and Media Prima have committed to air their respective channels through the said platform, which is widely believed to be able to accommodate up to 18 HD and 40-50 SD channels. Should this project (which we believe to cost around RM1bn) be implemented, we foresee stiffer competition ahead for AMH given that digital TV technology allows for content compression and hence, can accommodate a higher number of channels on the airwaves.
Source: OSK
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