This article first appeared in The Edge Financial Daily on August 16, 2017

Astro Malaysia Holdings Bhd
(Aug 15, RM2.69)
Downgrade to hold with a lower target price (TP) of RM2.47: Astro Malaysia Holdings Bhd had monopolised Malaysia’s direct-to-home (DTH) satellite pay-TV for over the past 20 years, and the exclusivity ended in February 2017.

Channel checks reveal that a new player is in the midst of entering the satellite pay-TV segment. Previously known as U Television, a cable TV operator (a subsidiary of the Berjaya group) is now reborn as Ansa Broadcast.

While details remain scarce, we understand that Ansa is currently deciding which satellite solution to adopt, either to lease bandwidth from operators or launch its own satellite. Implementation may take some time before service is officially launched.

If this materialises, Astro will face the pressure, which had been absent for the past 20 years, with Ansa’s entrance as a new DTH satellite player. While many non-satellite broadcasters (ABNXcess, MiTV and Mega TV) have failed historically, Ansa is not expected to be an overnight success, but it can be disruptive, offering aggressive pricing and content variances.

According to a recent news article, Astro is seeking a fair ground against over-the-top (OTT) players in Malaysia. Astro wants OTT players in Malaysia to be regulated by the Communications and Multimedia Act 1998. Astro believes that with a level playing field upon regulation, it will be in a better position as it owns most of the broadcasting rights in Malaysia. Given so, pirated OTT players remain a significant threat that can’t be avoided.

However, the still-weak ringgit will drive up content cost as most of Astro’s contents are sourced internationally (such as Sports, HBO, Disney and many more).

As the number of digital players increases, advertising expenditure (adex) has been spilling over from traditional platforms to digital. However, TV still has a lion share of the adex pie (40% of total adex). TV still acts as the most effective advertising medium, as most Malaysians still prefer the big screen (which explains Astro’s growing subscription rate at a compound annual growth rate of 4.5% from financial year 2013 [FY13] to FY17).

In a nutshell, the road ahead is expected to be tougher for Astro. Given the soft advertising market, it is crucial for Astro to sustain its subscription fees, and to evolve faster than ever to differentiate from its peers.

We cut our FY18 to FY20 earnings forecasts by 20%, 32% and 44% to RM562 million, RM589 million and RM618 million respectively, as we adjust for higher content cost and a lower subscription rate moving forward.

Astro is facing dismal adex growth, due to weak consumer sentiments. Besides, the challenging business environment from aggressive shifts in media platforms from traditional to digital is leaving the company in a tough position.

We downgrade our rating to “hold”, with a lower TP of RM2.47 from RM2.98, based on discounted cash flow valuation. — Hong Leong Investment Bank Research, Aug 15