This article first appeared in The Edge Malaysia Weekly on September 21, 2020 - September 27, 2020

SEVEN per cent dividend yield — that, in short, was why shares in Astro Malaysia Holdings Bhd gained 4.55% to 80.5 sen last Tuesday and continued to rise after the Malaysia Day trading break. The gains came after the country’s premier pay-TV service provider raised its quarterly dividend payout back to 1.5 sen per share — reversing the reduction to 1 sen in the previous quarter — despite earnings for the second quarter ended July 31, 2020 (2QFY2021) coming in just shy of annualised consensus expectations, though better than the first quarter.

Closing at 81 sen last Friday, the implied yield was 7.4% at the average dividend of 6 sen per share that analysts polled on Bloomberg expect the company to pay this year.

With 2.5 sen already in the bag, the implied yield would be 6.7% if the company keeps its quarterly dividend at 1.5 sen per share the rest of this year. The yield would still be 5.6% at current levels even if Astro decides to pay a lower dividend of 1 sen each for the remaining two quarters to bring the total dividend to 4.5 sen for the current fiscal year — more than twice the prevailing one-year fixed deposit (FD) rates.

With many corporates conserving cash in light of Covid-19 challenges, the scarcity of dividend payers may well be why the Employees Provident Fund has been accumulating Astro shares on the open market. The third-largest shareholder of Astro after billionaire Ananda Krishnan (41.29%) and Khazanah Nasional Bhd (20.67%), the EPF has raised its holdings in Astro by 44.2 million shares or 0.85% to 8.11% between May 21 and Sept 11 this year, stock exchange filings show.

Can Astro sustain its dividend payment at current levels?

The RM130.4 million dividend (2.5 sen per share) paid for the first half of the current fiscal year ending January 2021 (1HFY2021) is 63% of its RM207.5 million net profit and 19% of its RM687 million free cash flow for the same period.

A payout of 6 sen per share would require about RM313 million, back-of-the-envelope calculations show. Consensus earnings is at RM548 million for FY2021 and RM480 million for FY2022, according to Bloomberg data.

In FY2020, Astro’s RM391 million (7.5 sen per share) or 60% dividend payout was a deviation from its policy of paying 75% of profits as dividend.

If the numbers show Astro should be able to keep up dividend payments, why is the market concerned over Astro’s prospects?

Even though the stock has inched higher by about 19% from its recent low of 68.9 sen on March 19, there is still some distance to its 52-week high of RM1.44 on Sept 27 last year.

In fact, even among 14 analysts calling a “buy” on the stock, only one —Macquarie Research’s Prem Jearajasingam — has a target price (RM1.59) that is above its peak the past year, Bloomberg data shows at the time of writing.

Astro’s stock price currently hovers near the lowest target price (among analysts polled on Bloomberg) of 83 sen by Kenanga Research’s Clement Chua. In a Sept 17 note, Chua told clients: “We believe we have sufficiently factored in [the] impact of coming economic adversities to the group’s performance. Though our target price offers little capital upside, this is made up by [Astro’s] solid dividend yield of around 7%, which could attract medium-term investors. This should comfort investors who are also cautious of the upcoming content cost in FY2022 and FY2023 owing to the delay in global sporting events.”

Astro’s content costs had dropped in the first half of this year, coming in at only RM589 million compared with RM718 million in the first half of last year. This was attributed to content renegotiations as well as a pause in local content production and live sports due to social distancing rules and movement restrictions to curb the pandemic.

The results for 2QFY2021 included the impact of the RM20 per month (RM40 over two months) special rebate Astro gave its Sports Pack customers in June and July, as no live sports were played for two months during the pandemic. It is not immediately certain if those rebates were helped by the £330 million (RM1.76 billion) that the Premier League, for instance, had reportedly agreed to return to partner broadcasters globally for the down period during the Covid-19 induced lockdown.

Astro’s annual content cost was higher at RM1.8 billion in FY2019 when it had to pay for rights to the 2018 FIFA World Cup, compared with RM1.4 billion in FY2020 and RM1.6 billion in FY2018. The 2020 Summer Olympics is tentatively postponed to 2021, subject to the global pandemic situation. The next FIFA World Cup is in 2022.

Rather than over-the-top (OTT) players — which Astro is looking to partner and is hopeful of securing revenue-sharing deals that would come with lower content-cost burdens — it is the battle against content piracy that Astro is taking on more vehemently going forward. Already, it is using its reach to paint pirates as thieves.

A survey of 1,123 respondents by research and data analytics group YouGov in September, commissioned by the Asia Video Industry Association’s (AVIA) Coalition Against Piracy, for instance, found a 64% decrease in Malaysian consumers accessing piracy websites over the past 12 months at 22%, compared with 61% in the previous survey in August 2019. More than half (55%) also said they noticed that a pirate service had been blocked by the Ministry of Domestic Trade and Consumer Affairs — something that researchers say “would appear to have an impact on consumer attitudes towards piracy”.

If the results are indeed reflective of sentiment on the ground, Astro has a fighting chance of defending its valuable paying subscriber base. While total TV customer base remained strong at 5.7 million as at end-July, our back-of-the-envelope calculations show that about 2.9 million of its customers today may be on the free-streaming NJOI platform — just ahead of its 2.8 million regular pay-TV customers.

Our estimates also show that NJOI customers exceeded regular pay-TV subscribers in the first quarter of this fiscal year, up from 40% in FY2018, 43% in FY2019 and 48% in FY2020. Astro no longer discloses the split between NJOI and its regular pay-TV customers since FY2017. Still, its average revenue per user (ARPU) was steady at RM98 in 2QFY2021 compared with RM99.1 in 1QFY2021 despite the sports rebate.

In a statement accompanying its 2Q earnings release, group CEO Henry Tan says Astro “remains cautious” in the second half of this year “due to prevailing uncertainties amid the pandemic, structural changes in the media industry and the ongoing acts of piracy”.

Tan says the group is “mindful of the potential impact on consumers’ disposal income and sentiments when the loan moratorium ends” but added that Astro’s “agility in adapting to the new normal” has allowed it to deepen its engagement with customers, strengthen its value proposition and seize opportunities for adjacencies in commerce, broadband, digital and OTT.

“We are committed to be the entertainment destination for Malaysians and will drive digital, aggregate more streaming OTT services, push broadband bundles, produce more winning and compelling content while simplifying our products, packages and processes,” he adds.

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