Recent results show improvements in major indicators
Delay of Measat 3B satellite launch not a major concern
ASTRO Malaysia Holdings Bhd's recent financial results offered investors more reasons to be optimistic on the pay-TV operator’s outlook, as improvements were seen in major indicators.
For a start, the company’s subscriber base expanded by over 2% to 3.99 million subscribers versus 3.88 million subscribers in the fourth quarter of its 2014 fiscal year, representing a TV household penetration rate of 58%. The growth was driven by both its NJOI and pay-TV segments. NJOI is Astro’s subscription-free satellite TV service.
From the 122,000 new customers it signed up, 28,000 were pay-TV subscribers.
The increase in subscriber base did not result in any dilution of its average revenue per user (ARPU). In fact, for the first quarter of fiscal 2015 which ended Jan 31, 2014, the pay-TV operator’s ARPU rose to RM97.1, versus RM96 in Q4 FY2014 and RM94.2 in the same quarter a year ago. [RM1 = US$0.31]
“The higher ARPU was mainly driven by subscription price increases in Q4 2014 and improved take-up of valued-added services,” Public Investment Bank analyst Lee Wee Sieng said in a research report.
While Astro's subscriber base increased during the quarter, its churn rate stood at 9.9% [Q1 FY2014: 7.9%; Q4 FY2014: 9.9%].
“Astro is not overly concerned about the higher churn rate of 9.9% given that 75% of customers stopped using its services involuntarily due to missed payments and other [reasons]. Hence, the actual churn rate was lower,” CIMB Investment Bank analyst Mohd Shanaz Noor Azam said in his report.
For the full financial year, Astro said that it plans to increase its subscriber base by 450,000 to 500,000, comprising 100,000 to 150,000 new pay-TV subscribers.
“While this target may be challenging given that we expect more fuel price and/ or electricity tariff hikes in the second half of [calendar year] 2014, we believe this is still achievable due to the ongoing FIFA World Cup," said Maybank Investment Bank analyst Yin Shao Yang. “Past World Cup events have had a positive impact on pay-TV net adds.”
Besides showing encouraging numbers on the subscriber end, Astro also registered growth in revenue, earnings, margins and free cash flow.
Astro announced that fiscal first quarter net profit rose 13% to RM129 million compared with RM114 million in the same quarter a year ago. Its revenue increased by 11% to RM1.25 billion, versus RM1.1 billion in the first quarter of fiscal 2014. During the period, its earnings before interest, tax, depreciation and amortisation (EBITDA) increased by one percentage point to 35%.
Equally attractive was the company’s free cash flow improvement. It now has a free cash flow of RM282 million, an improvement of 6%. This may be a sign of possible higher rewards to shareholders in terms of dividends.
During its first quarter results briefing to analysts, the company also revealed three additional details. First was that Astro is still facing operational challenges due to the lack of slot capacity in the Klang Valley and Penang, in terms of its IPTV service. It told analysts that talks are still ongoing with its partners to resolve ongoing operational issues.
Second was the launch of the Measat 3B satellite being delayed to September. This means the pay-TV operator would need to defer the launch of additional channels until new transponder capacity becomes available.
“While Astro stands to save RM50 million in capex (capital expenditure) and depreciation per annum from the delay, this will defer its plans to introduce more channels, impacting growth,” said Yin.
Once the Measat 3B satellite is launched, Astro will have access to 18 transponders, giving it the ability to increase its offerings from the current 179 channels to 245 channels.
Third was guidance for its new business venture, home shopping. Astro said it was targeting RM500 million in revenue contributions from the home shopping segment within the next four to five years, as well as a 20% EBITDA margin per annum. It is believed that the company could earn carriage fees and studio rentals of RM100 million to RM200 million a year.
Astro signed a shareholder agreement with GS Home Shopping Inc to set up Astro GS Shop Sdn Bhd, 60% owned by Astro and 40% owned by GS Home. GS Home is a South Korean-based company specialising in the home shopping business.
“We believe it is a positive move by the company to diversify its operations, and a good way to leverage on its readily available facilities such as the call centre, channel platforms and production studio,” said CIMB Investment Bank's Mohd Shanaz.
What should investors do?
Analysts were mixed when it came to making recommendations to investors on what they should do with their Astro shares.
Kenanga Research analyst Desmond Chong highlighted that Astro’s first quarter earnings were below his research house’s expectations. In fact, Chong downgraded the recommendation for Astro to 'Underperform' with a target price of RM3.10.
“Although the group’s long-term prospects look promising, its current valuation appears to be overstretched with FY15 PER [Price to Earnings Ratio] of 32.2x, thus capping its potential upside,” said Chong.
PER is one of the measures to determine how expensive a stock is. Companies having a high PER are usually deemed as more expensive, especially if another company in the same industry is trading at a significantly lower PER.
While there is no other pay-TV operator listed in Malaysia, Astro is occasionally compared to other media companies such as Media Prima Bhd, Star Publications (Malaysia) Bhd and others. These media companies have an average PER of approximately 15 times.
Some analysts were a bit more optimistic.
Kunal Vora, an analyst from BNP Paribas, maintained his 'Buy' call on the stock, but with a higher target price of RM4.00 versus the previous target price of RM3.55.
“Astro’s margins are rising as its HD (high-definition) box deployment is concluding. We lift our FY15 and FY16E (fiscal 2016 estimates) EBITDA by 3% [to RM1.89 billion and RM2.1 billion, respectively] on higher margins and our target price to RM4.00 on higher EBITDA estimates and our discounted cash flow valuation rolling over to April 2015.
“At 9.8x FY16E EV/ EBTDA, we find Astro attractive for its strong growth prospects and market dominance,” he said.
EV/ EBITDA, like PER, is another valuation multiple to measure the value of a company. EV is Enterprise Value.
CIMB’s Mohd Shanaz also revised upwards his target price for Astro. The research house now has a RM3.90 target price on Astro, versus the RM3.60 previously.
“We expect stronger earnings contribution in the coming quarters, driven by major sporting events such as the FIFA World Cup and Commonwealth Games. In addition, we expect the additional capacity which is likely to come in FY15 to further support the company’s growth strategy,” he said.
Other analysts who increased the target price include Citi Research’s Petrina Chong, who raised the target price to RM4.29 (versus the previous RM3.37), and Hong Leong Investment Bank’s Low Yee Huap, who raised target price to RM3.88 from RM3.72.
On June 20, Astro shares on Bursa Malaysia fell by 3.4% to RM3.38.
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