This article first appeared in The Edge Financial Daily on October 24, 2018

Astro Malaysia Holdings Bhd
(Oct 23, RM1.25)
Maintain outperform with a target price of RM2: Since the announcement of weak second-quarter financial year 2019 (2QFY19) results, Astro Malaysia Holdings Bhd’s (Astro) share price slumped 18.1%. For the coming 3Q, we expect an earnings recovery due to a normalisation of content cost and advertising expenditure (adex) after the World Cup and the tax holiday period. At the current level, we think the market had priced-in negative factors concerning the group’s prospects. Another potential catalyst would be the possible merger and/or privatisation by its major shareholder.

Convergence is the key to staying relevant in the long run. Astro is currently facing the risk of regulatory pressure with the new government planning to liberalise and promote competition in the pay-television segment (as mentioned in the Pakatan Harapan manifesto and the midterm review of the 11th Malaysia Plan — to review and streamline the role of monopoly entities), through providing more broadcasting licences to new players. While it may be challenging for new players to survive in the long term given the capital expenditure-intensive nature of the industry, the heavy investment required for content cost and the exclusivity of broadcasting rights, a foreign convergence player with experience in the telecommunication and media industries could still post an unprecedented threat to the local pay-TV incumbent. In our view, a merger with Maxis Bhd would be able to address this issue and enable Astro to compete effectively as a convergence player, offering disparate mobile, fixed broadband and pay TV services in a single package. We have also worked out the potential impact of a merger deal (the report entitled “An Undeniable Marriage?”, dated July 26, 2018) and concluded that it is favourable to Astro as the shares will most likely be priced at a premium in the deal and the combined entity will benefit from earnings accretion being a convergence player.

An earnings recovery is expected. To recap, despite recording flat revenue, Astro’s normalised net profit slumped 80.8% year-on-year to RM46.6 million in 2QFY19, mainly hit by a jump in content cost for the 2018 Fifa World Cup broadcasting rights and worsened by a weaker ringgit, a weaker-than-expected adex due to the reduced need to advertise during the tax holiday period (June to August 2018) and a higher finance cost. However, after the 2018 Fifa World Cup and the tax holiday (where only one month falls in 3QFY19), we expect the exceptionally high content cost and weak adex to normalise, hence the group’s results to recover in the subsequent quarter.

Astro’s share price slumped 18.1% since the announcement of weak 2QFY19 results. At the current level, we think the recent selldown of the shares was overdone. Currently, the stock trades at only 10.8 times price-earnings to FY20 forecast earnings per share of 12.5 sen (more than two standard deviation below its five-year historical average), and offers a compelling dividend yield of about 7% per annum. We also note the single largest shareholder, T Ananda Krishnan, has been accumulating Astro shares in the market recently (total shares bought since June 2018: 14.2 million). Based on our technical idea dated Oct 21, 2018, Astro is potentially forming a double bottom chart pattern. We anticipate a continuous improvement in momentum and trend in the near term that may lead to a higher price to the subsequent resistance level of RM1.53. — PublicInvest Research, Oct 23