Astro - Hopes to remain as Malaysia's leading media company

● At an investor presentation, Astro’s management team outlined its strategy to ensure that the company can withstand competition from OTTs and behavioural changes among today’s consumers to sustain its leadership in Malaysia’s media industry.
● In short, the company hopes to retain its ~70% household penetration in Malaysia so that it can sustain its revenue growth trajectory by driving its non-pay-TV revenue (notably adex, home shopping and other revenue such as licensing revenue).
● To do that, Astro will focus on three key drivers: (1) it hopes to digitalise its platform (75% by end-17); (2) it would like to scale its digital ventures and convert them into revenue streams; and (3) it will strengthen its verticals and build a robust innovation pipeline.
● We make the following changes to our model: (1) USDMYR exchange rate for FY19E onwards reduced to RM4.00 from RM4.25; and (2) we raise our MYR denominated content cost to ~11-12% of TV revenue from 10%. Our forward EPS is raised by a modest ~3%, so our DCF-based TP is unchanged at RM2.80.

Near-term dividend outlook remains promising, but we are not particularly bullish on the stock, as yet
At a well-attended investor presentation held earlier today, Astro’s senior management team outlined its strategy to ensure that the company can withstand competition from OTTs and behavioural changes among today’s consumers to sustain its leadership inMalaysia’s media industry.

In short, the company hopes to maintain its ~70% household penetration in Malaysia so that it can sustain its revenue growth trajectory by driving its non-pay-TV revenue (notably adex, home shopping and other revenue such as licensing revenue). To do that, the company focus on three key drivers (more on this next).

We make the following changes to our model: (1) USDMYR exchange rate for FY19E onwards reduced to RM4.00 from RM4.25; and (2) we raise our MYR denominated content cost to ~11-12% of TV revenue from 10% (to produce more vernacular content). Our EPS is raised by a modest ~3%, so our DCF-based TP is unchanged at RM2.80. While its near-term dividend outlook remains promising, our DCF target price offers little upside at this juncture. As such, we retain our NEUTRAL rating on the stock.

Driver 1: 75% of platform to be digitalised by end-2017 Management believes that it is crucial to digitalise its platform as soon as possible for three key reasons: (1) consumers today consume content via various platforms, especially digital ones i.e. smartphones,
tablets etc.; (2) it allows for cost efficiency and scaling ( e.g. Tribe); and (3) if its brand leadership remains strong even in the digital space, it can replicate its successful track record in the adex business to drive more revenue.

Figure 1: Tribe continues to gain prominence in Indonesia, the Philippines and Singapore

Driver 2: To scale its digital ventures and convert them into revenue streams Management also highlighted that its digital investments such as Tribe and eGG Network are gaining traction within ASEAN, notably Indonesia, the Philippines and Singapore. If the management team is able to sustain this momentum, there is room to drive two new revenue streams, which we have not factored into our model: (1) digital adex in this channels (still nascent currently); and (2) wholesale subscription revenue.

Driver 3: To strengthen its verticals and build a robust innovation pipeline We agree with management that Astro’s strong vernacular offering is still a crucial factor to retain its subscriber base (it produced multiple top movies in the country over the last few years e.g. Polis Evo and The Journey and top dramas such as Suri Hati Mr Pilot). As such, management intends to maintain its value proposition by producing more vernacular content (hence, we raise our MYR denominated content cost assumption to ~11-12% of TV revenue). More importantly, management is attempting to further drive its return on investment by strengthening its licensing capabilities so that these content can also be exported to other regions (a positive development, in our view).

source: Credit Suisse – 01/08/2017