Astro Malaysia Holdings - The Pay-TV giant is back!

We are initiating coverage on Astro Malaysia Holdings Berhad (“ASTRO”) with a MARKET PERFORM rating and a target price of RM3.17 based on a DCF valuation (WACC: 8.9%, Beta:  1.0, Terminal growth: 1%). ASTRO is engaged primarily in the creation, aggregation and distribution of content over multiple delivery platforms, including TV, radio, publications and digital media within Malaysia. ASTRO is also the Pay-TV incumbent in Malaysia where it is 1) the exclusive Directto-Home (DTH) licence holder in Malaysia with a nationwide reach of 6.7m households; 2) a rich content distributor with exclusive rights for some third-party internationally sourced channels in Malaysia; and 3) a group with deep pockets for high capex requirements. We believe that its leadership position creates a significant entry barrier for any competitors. We like ASTRO for its strong cash generating profile and its premium leadership position in the pay-TV market. Our current MARKET PERFORM rating is premised on the stock offering an upside of 9% of our Target Price.

South-East Asia’s leading integrated consumer media entertainment group. ASTRO is one of Southeast Asia’s leading integrated consumer media entertainment groups where it is engaged primarily in the creation, aggregation and distribution of content over multiple delivery platforms including TV, radio, publications and digital media within Malaysia. ASTRO was incorporated in February 2011 and it acquired the Malaysian businesses of Astro All Asia Networks Limited (AAAN) as part of the group’s reorganisation in March 2011 and April 2011. Effectively, ASTRO houses only the Malaysian business of AAAN. 

Ample room for a higher household penetration rate to drive the subscriber base. Although Malaysia has a higher pay-TV penetration rate of 50% as compared to its regional peers such as Vietnam (19%) and Thailand (14%), it is still lagging behind some of the higher income countries such as  South Korea (122%), Taiwan (97%), Hong Kong (93%) and Singapore (70%). We believe the penetration rate in Malaysia will continue to grow given the increasing household income level as well as the rising proportion of households moving into the higher income band.  

 Value-added services and innovative new initiatives will sustain its residential ARPU growth. ASTRO’s residential average revenue per user (ARPU) has remained flattish for two consecutive years since FY08. However, thanks to the introduction of value added services and innovative new initiatives since Dec 2009, its residential ARPU has since consistently increased and in 1HFY13, it recorded an alltime high ARPU of RM92. We believe that HD and PVR were the strong drivers for the ARPU growth for ASTRO as global data showed that the launch of these value-added services by the other regional pay-TV players had also appeared to have a positive impact on their ARPU as well.

Leading position creates significant barriers to entry. We reckon that given ASTRO’s leading position as: (i) the exclusive DTH licence holder in Malaysia with a nationwide reach of 6.7m households, (ii) a rich local content producer and distributor with exclusive rights for some third-party internationally sourced channels in Malaysia, and (iii) it being a group with deep pockets for high capex requirements, all these have created significant barriers for competitors to enter into the market. 

Initiating coverage with a MARKET PERFORM rating and a TP of RM3.17. Given the strong cash generating profile of ASTRO and its potentially high cash flow (due to its stable earnings streams, capex visibility and ASTRO’s targeted dividend payout ratio of not less than 75% of its consolidated profit starting from FY14), we have valued ASTRO using the DCF method based on an explicit forecast for a period of 10 years. Our DCF-derived target price of RM3.17 is based on the Weighted Average Cost of Capital (WACC) of 8.9%. Our key assumptions are a market risk premium of 7.0%, risk free rate of 3.5% (long term yield for Malaysian Government Securities), a Beta of 1.0 (3-year average Beta for its global peers) and terminal growth rate of 1%. 

Source: Kenanga