Better times ahead for Astro, say analysts

• Rising content costs – up to 35% of revenue – not a major issue, analysts say
• Completion of STB swap-out exercise to lower capex, improve margins over time

ANALYSTS expect better times ahead for Astro Malaysia Holdings Bhd, despite the rising content costs being experienced by the satellite TV operator.
 
In a briefing with analysts, Astro said that it expects content costs to rise to about 34% to 35% of revenue in the current financial year ending Jan 31, 2015 (FY15), compared with the 32% to 33% in FY14.
 
The rise in content costs will mainly be driven by major sporting events such as FIFA World Cup and the Glasgow Commonwealth Games.
 
“However, Astro remains confident that it will be able to monetise its investments effectively given that it has formed a strategy to attract viewership through its mobile platform, aside from [the] traditional TV platform,” CIMB Investment Bank analyst Mohd Shanaz Noor Azam said in a report.
 
In the research report, Mohd Shanaz revised upwards his profit forecast on Astro by 2% for FY15 after taking into account the company’s better average revenue per user (ARPU) and adex (advertising expenditure) growth.
 
“We expect FY15 to be a better year for Astro due to the completion of its set-top-box (STB) swaps which could result in future cost savings. Moreover, a major sporting event such as the FIFA World Cup is expected to help lift its ARPU,” said Mohd Shanaz, who placed a target price of RM3.60 on Astro.
 
[RM1 = US$0.31]
 
UBS, a global financial services company headquartered in Basel and Zurich, agreed that Astro is an “attractive” investment due to a combination of the completion of its investment phase and its lagging share price performance.
 
“We maintain our view that the company remains one of the best proxies for Malaysia’s consumption growth story; that is, a young, rapidly urbanising population base, with an increasing propensity to consume amid rising income levels,” said UBS Securities Malaysia analyst Chris Oh.
 
In his report, Oh said that some events and data points could be potential catalysts for Astro shares to move upwards. These include a better than expected ARPU growth (the company expects ARPU to hit RM100, from the current RM96); competitive threats being proven unfounded; the possible success of its subscription-free service Njoi; and higher dividend payments in tandem with earnings growth.
 
Lower capex moving forward
 
Analysts are also expecting lower capex (capital expenditure) from Astro moving forward, given that its STB swapping exercise is coming to an end.
 
So far, the Astro B.yond STB has achieved a 84% swap-out rate, with only 559,000 STBs remaining. The entire exercise will be completed this financial year, according to Astro.
 
“Most of the capex has already been recognised by Astro to position itself for future earnings growth. Hence, we expect lower capex of ~RM550 million going forward as compared to ~RM630 million in FY14,” said HIB Research analyst Jason Tan Yat Teng.
 
In the research report, Tan has also upgraded his recommendation on Astro to a ‘BUY’ with a target price of RM3.72. The research house previously placed a ‘HOLD’ call on the stock.
 
Deutsche Bank Market Research analyst Wu Wei-Shi highlighted that the completion of the STB swap-out exercise will also help improve its margins over time.
 
“We anticipate margin recovery will drive more than 30% earnings per share (EPS) growth over the next few years,” said Wu. The research house placed a BUY call on the stock with a 12-month target price of RM3.73 per share.
 
Home Shopping catalyst
 
Although Astro did not elaborate much on its new business venture, Home Shopping, analysts expect it to leverage on its existing facilities for the new home shopping channel.
 
“We expect Astro to leverage its readily available facilities such as a call centre, channel platforms and a video production studio for the new home shopping channel,” said CIMB Investment Bank’s Mohd Shanaz.
 
The company expects its home shopping channel to be launched in September this year, with the first channel mainly targeted at Malay customers.
 
The venture into the home shopping business came after the satellite TV operator signed a shareholders agreement with GS Home Shopping Inc to set up Astro GS Shop Sdn Bhd.
 
Astro GS Shop is 60% owned by Astro (via Astro Retail Ventures Sdn Bhd) and 40% owned by GS Home. GS Home is a South Korean-based company specialising in the home shopping business.
 
“We recently upgraded Astro to ‘Buy’ on the view that its transformation into a lifestyle company will increase its relevance to consumers and strengthen its core positioning. Astro’s home shopping venture is potentially interesting, given market conditions are ripe for e-commerce take-off in Malaysia,” said Deutsche Bank Market Research’s Wu.
 
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