This article first appeared in The Edge Financial Daily on June 14, 2017

Astro Malaysia Holdings Bhd 
(June 13, RM2.55)
Maintain outperform with an unchanged target price of RM3.22: Astro Malaysia Holdings Bhd and Kumpulan Media Karangkraf Sdn Bhd have agreed to set up a joint venture (JV) company to pursue co-creation of a comprehensive line-up of content intellectual property (IP) across Malay and Islamic verticals. They entered into a memorandum of understanding to form a JV company for the creation and monetisation of content verticals in Malaysia and the Nusantara region. Via the collaboration, both companies aim to maximise potential monetisation from digital expenditure, licensing, advertising expenditure (adex), subscriptions and commerce.

Karangkraf is a publishing company, with 15 million readers across its print, magazine publications and online media assets. Today, the content industry in the Nusantara region commands a total addressable market of RM48 billion, which makes local vernacular and Asean content IP the new premium. Ownership of these IP allows both companies to maximise potential monetisation of digital expenditure, licensing, adex, subscriptions and commerce. Both parties are at the discussion stage of the JV company’s structure and are in the midst of reviewing the IP and contents. According to Astro group chief executive officer Datuk Rohana Rozhan, its content creation expenditure for the financial year 2017 was about RM1.9 billion, of which 22% was for Malay vernacular. Following the new venture, Astro aims to increase its spending on Malay vernacular content to 33% over a five-year period.

Meanwhile, Astro’s wholly-owned subsidiary Measat Broadcast Network Systems Sdn Bhd (MBNS) has received approval to set up a RM3 billion medium term note (MTN) programme. The proceeds raised will be used by MBNS to finance its cost relating to the production, purchase and licensing of content/programmes/channels, set-top boxes and capital expenditure. It will also be used to refinance any maturing MTNs issued under the MTN programme and/or lending to Astro and its subsidiaries. The tenure of the MTN programme is for 15 years from the date of the first issuance. Following the issuance of RM3 billion MTNs, Astro’s net debt per earnings before interest, taxes, depreciation and amortisation (Ebitda) leverage level will be bumped up to 3.2 times from the existing 1.5 times. Though the leverage level appears to be high, we understand that the group is still able to comply with the requirement of maintaining a net debt/Ebitda of not exceeding four times.

Overall, we believe that the collaboration with Karangkraf would be positive for Astro in the long term as it would fit into its focus on strengthening investments in signature vernacular and Asean IP to further enhance its subscribers’ value and monetise its value-added services and contents. Although no immediate earnings contribution, we think that these investments are necessary for future growth. — PublicInvest Research, June 13