This article first appeared in The Edge Financial Daily, on September 14, 2016.

Astro Malaysia Holdings Bhd
(Sept 13, RM2.88)
Maintain buy with an unchanged target price (TP) of RM3.78: Astro Malaysia Holdings Bhd is acquiring Capital FM Sdn Bhd (CFSB) from Star Media Group Bhd (Neutral; TP: RM2.46) for a total cash consideration of RM42 million. CFSB holds the apparatus assignment that permits it to operate Capital FM and Red FM radio stations.

The acquisition is aimed at acquiring additional radio spectrums and frequencies which are scarce in Malaysia. This will enable Astro to further strengthen its presence in the radio industry. Astro intends to rebrand and broadcast these two radio stations via on-air and online platforms. Presently, Astro has nine radio stations under its stable. This includes ERA fm, MY FM, hitz fm, MIX fm, Lite FM, Sinar FM, Thr (Raaga and Gegar) and Melody FM. Astro will utilise internally generated funds to carry out the acquisition. As at April 30, 2016, Astro had a cash pile of RM792.2 million. As such, the acquisition would only reduce Astro’s cash position by approximately 5%.

There are two risks associated with the acquisition: Firstly, the licence owned by CFSB has just been recently renewed until 2026 and there is no guarantee that the licence will be renewed beyond that; secondly, the rebranding of the two radio stations would require approval of the Malaysian Communications and Multimedia Commission. In the event that it is not approved, Astro would then need to explore other commercially viable options to utilise CFSB’s licence and its respective frequencies.

We are maintaining our earnings estimates at this juncture pending further details of the rebranding exercise. Historically, Astro’s radio segment has been recording positive contribution to the group. In the financial year ended Jan 31, 2016 (FY16), the radio segment contributed about 20.5% of the group’s profit before tax. We are maintaining our TP of RM3.78 per share. This is premised on FY18 earnings per share of 13.5 sen against forward price-earnings ratio (PER) of 28 times. Our PER assumption is based on the historical average low PER since its listing.

Despite various headwinds affecting the media industry, the group continues to outperform by successfully expanding its customer base through a dual model — premium and freemium market approaches. Based on the business model, the income stream is mainly derived from subscription revenue as opposed to advertising revenue. In addition, the group also expanded its revenue stream by tapping into the consumer market through its home shopping business venture. Moreover, its continuous cost management strategy has also kept operating cost at bay. As a result, the business has strong cash-generation capability which enables the adoption of a progressive dividend policy. At present, we believe that the stock offers an attractive dividend yield of more than 4%, which further elevates Astro’s attractiveness. — MIDF Research, Sept 13