This article first appeared in The Edge Financial Daily on June 29, 2018

Astro Malaysia Holdings Bhd
(June 28, RM1.60)
Maintain add with an unchanged target price (TP) of RM2.70: The Malaysian Reserve’s interview on Tuesday with the new Communications and Multimedia Minister Gobind Singh Deo centred on the Pakatan Harapan government’s desire to “liberalise” Malaysia’s pay-TV space. With more players entering the field, he said, this would create a healthier market and prompt broadcasters to improve their services. According to Gobind, he would also sit down with Astro’s top management and discuss customers’ concerns — which include subscription pricing.

This news is not a surprise to us, nor is it likely to have a significant impact on Astro. Its agreement as the exclusive satellite TV broadcaster in Malaysia expired in February 2017. There are 22 content application service providers eligible to apply for satellite broadcasting — with Ansa Broadcast Sdn Bhd reportedly hoping to enter the field. Astro has faced mounting competition since its inception due to pirated content, and Internet streaming has opened up access to global content providers.

Being a satellite TV broadcaster is financially consuming, and one has to endure a long gestation period. Compared with over-the-top Internet streaming content providers, satellite broadcasting is regulated and requires heavy investments in infrastructure. The Malaysian Communications and Multimedia Commission reported that the aggregate penetration rate for fixed and mobile broadband was 115.9% as at the first quarter of 2018, making the Internet a highly accessible medium.

As we highlighted in a previous strategy note, Astro’s strength is in content ownership. Any aspiring pay-TV broadcaster would face an uphill battle catching up in terms of building up its infrastructure and subscriber base. Content costs tend to perennially escalate; Astro itself spent RM1.6 billion on content in financial year 2018. Sanctity of commercial agreements should also preclude the Pakatan government from breaking up Astro’s existing exclusive deals with content providers — at least not without fair compensation.

We do foresee a possibility in the future that the newly elected government could instruct Astro to share some of its popular content rights with another broadcaster. This was seen in Singapore, where Singapore Telecommunications Ltd was forced to cede its exclusive rights to broadcast the Premier League and jointly air the programme with StarHub Ltd. We see potential risk of losing some premium-tier subscribers but this should not be a major deal breaker for now.

In our view, more pay-TV providers in Malaysia would not disrupt Astro’s business in the short term. Astro’s main risk, as it has always been, comes from the ubiquitous piracy market. Potential catalysts are a pickup in consumer sentiment and higher dividend payout. We maintain our “add” call with an unchanged discounted cash flow-based TP of RM2.70. — CGSCIMB Research, June 27