PUBLIC INVESTMENT BANK

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1 PUBLIC INVESTMENT BANK PublicInvest Research Company Update Thursday, July 26, 2018 KDN PP17686/03/2013(032117) ASTRO MALAYSIA HOLDINGS BERHAD Outperform DESCRIPTION A leading consumer media entertainment group, renowned as Malaysia s sole satellite TV service provider, with pay TV, radio, publications and digital media broadcasting operations. 12-month Target Price RM2.25 Current Price RM1.81 Expected Return 24.3% Market Main Sector Media Bursa Code 6399 Bloomberg Ticker ASTRO MK Shariah-Compliant No An Undeniable Marriage? We had earlier highlighted the challenges faced by Astro, in particular pay TVrelated weaknesses given the proliferation of over-the-top (OTT) options at more affordable pricing amid increasing content piracy. We lower our earnings estimates by 1-3% for FY19-21F while also cutting the terminal growth assumption to 0.5% due to the increasingly challenging outlook for pay TV operators. Our TP is consequently reduced to RM2.25 (from RM3.00). Despite the cut in our TP, Astro s valuation looks compelling in light of a yearto-date decline in price of 28%. We reiterate our Outperform call on Astro given its attractive valuation, decent dividend yield and on a possible merger with Maxis, merits of which are discussed in greater detail in page 4 of this report. SHARE PRICE CHART Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul Week Range (RM) Month Average Vol ( 000) 6,468.6 SHARE PRICE PERFORMANCE 1M 3M 6M Absolute Returns Relative Returns KEY STOCK DATA Market Capitalisation (RMm) No. of Shares (m) MAJOR SHAREHOLDERS 9, ,213.9 % Pantai Cahaya Bulan Ventures 20.7 All Asia Media Equities 19.4 E Asia Broadcast Network Systems 8.1 Chua Yi Jing T F E chua.yijing@publicinvestbank.com.my Declining pay TV subscriber base but not completely phased out. Against the backdrop of a saturated market, growing competition from alternative viewing means and the inherent difficulties in keeping a check on piracy, we believe Astro s number of pay TV subscribers is on the decline, putting it under pressure to expand its bread-and-butter pay TV subscription revenue. While we believe the cord cutting trend will continue due to growing younger generation, we think that Astro s pay TV will not be completely phased out as yet and should still remain relevant in the next ten years, thanks to the older generation who tend to be stickier post-subscription. Based on our estimates, this pool of olderaged customers should still generate an annual net profit of RM300m. Revenue diversification and cost rationalisation to buffer pay TV weakness. Given pay TV-related weaknesses, Astro plans to expand other businesses revenue (i.e. NJOI, Go Shop and TV adex) and optimise its cost (via digitalisation and content cost renegotiation). The Group is also tapping on the opportunities in the underserved Malay digital content network via strategic partnerships. Despite having the exclusive rights to broadcast all 64 matches of the recently-concluded 2018 FIFA World Cup, we do not expect Astro to deliver exciting results given the higher content cost, increased number of World Cup matches broadcasted on RTM and free streaming provided by illegal online streaming and gaming operators. Convergence the best option. With the digital revolution disrupting the media industry and the telecommunications sector also facing challenges in growing their traditional mobile business in a saturated market, we believe a marriage between Astro and Maxis would benefit both parties, made all the more possible with T.Ananda Krishnan being the single largest shareholder of Maxis (62.4%) and Astro (24.0%). Merging Maxis wireless and broadband networks with Astro s content offering capabilities and pay TV business would create convergence and thus, synergies to the enlarged entity. In order to remain relevant in the fastchanging telecommunication and internet industry, convergence has become a core strategy for operators in developed markets. We believe Malaysian operators will also be heading in the similar direction. KEY FORECAST TABLE FYE Jan (RM m) 2017A 2018A 2019F 2020F 2021F CAGR Revenue 5, , , , , % Pre-tax Profit , % Net Profit % Core Net Profit % EPS (Sen) % P/E (x) DPS (Sen) Dividend Yield (%) Source: Company, PublicInvest Research estimates 1 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 1 of 8

2 Pay TV cord-cutting a global trend Pay TV weakness. Astro s current market reach in Malaysia is fairly saturated at 5.5m or 75% of Malaysian households as at 1QFY19. Although quantum of the drop in number of pay TV subscribers is unquantifiable due to the discontinued disclosure by Astro, we believe the number is on the decline judging from weaker subscription revenues. Against the backdrop of a saturated market, we think Astro is now finding it a struggle to expand its bread-and-butter pay TV subscription revenue. The cord-cutting trend can also be seen in other countries pay TV operators such as Singapore s StarHub and Singtel as well as US AT&T, Dish Network, Comcast and Charter Communications. The global pay TV industry landscape continues to face challenges of growing competition from alternative viewing means and the inherent difficulties in keeping a check on piracy. Figure 1: Astro s TV Customer Base '000s Pay-TV NJOI Total TV customer base 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 1,654 1,268 1,579 1,163 1,481 1,071 1,395 1,016 5,153 3,505 3,520 3,534 3,550 3,504 3,493 3,443 3,467 5,489 5,334 5,484 5,262 2,000 1QFY16 3QFY16 1QFY17 3QFY17 1QFY18* 3QFY18* 1QFY19* *Note: Astro has not disclosed the breakdown of pay TV and NJOI customer base since 1QFY18. Source: Company, PublicInvest Research Figure 2: StarHub and Singtel s TV Customer Base StarHub TV customer base Singtel TV customer base Source: Companies, PublicInvest Research 2 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 2 of 8

3 but not too bad in the near to medium term Competition always a pressure. With more affordable and faster internet packages offered by Telekom Malaysia, Malaysians would be able to get better video streaming experience on OTT or illegal streaming sites, which is negative to Astro. That said, Malaysia s broadband monthly fees are still relatively expensive as compared to other countries such as RM134/1,000Mbps in Singapore. Remaining relevant in the near to medium term. While we believe that the cord cutting trend will continue to increase in line with population growth particularly amongst the young, we think Astro s pay TV offerings will not be completely phased out and should still remain relevant in the next ten years, at least amongst the older generation. Cord cutters tend to be the younger generation as the older generation who usually do not have home broadband access or have limited knowledge in internet usage tends to be stickier post-subscription. We note that approximately 5m or 14% of Malaysia s population is above the age of 55 years which we believe should remain the captive market for Astro s pay TV. Based on our estimate, this pool of customers should still generate an annual net profit of RM300m. Liberalising Malaysian pay TV market? With the new government planning to liberalise and promote competition in the pay TV segment in order to create a healthier market space, we believe newcomers may be granted broadcasting licenses. That said, it would not be easy for newcomers to compete effectively considering the high start-up cost. Also, new players would not only compete with Astro but also against the Internet Protocol Television (IPTV), OTT players and illegal content providers. Potential impact from new players? The entry of new pay TV players in Malaysia is nothing new. In fact, Astro s exclusive direct-to-home (DTH) satellite license had long expired since February last year. We think that the main barrier to entry for the new players for now is not the exclusive licensing but the capex-intensive nature of the industry, heavy investment required for content cost and the exclusivity of broadcasting rights. Many players have tried to compete with Astro over the years but none have been able to dethrone the satellite TV provider. For instance, Asian Broadcasting Network (M) Sdn Bhd (ABNxcess) which had secured a five-year digital cable broadcast license from the government in 2012 only managed to attract 50,000 subscribers before suffering from financial difficulties and winding-up in 2017 after its creditors secured a court order to liquidate the company. Similarly, etv (IPTV) closed down in 2016 after experiencing difficulties in staying afloat for the past 8 years. Revenue diversification and cost rationalisation to buffer earnings decline Revenue diversification. Given the struggle in growing its subscription revenue, Astro is looking to expand via other streams such as NJOI, Go Shop and TV adex. NJOI s ARPU currently stands at slightly above RM2 with only less than 20% of NJOI users purchasing prepaid packs. Astro is looking to grow its NJOI prepaid segment in terms of number of customers as well as time and amount they spend on prepaid packs by enhancing customer experience, such as more channels to purchase prepaid and allow customers to preview premium content. In addition, Astro has also embarked on cost optimisation initiatives such as i) content cost renegotiation with third-party content providers, already partly evidenced by the lower content cost in FY18, and ii) digitalisation to leverage on cloud-based technologies to enhance customer experience (through digitalising customer interactions and better profiling and recommendations) and improve cost efficiency. 3 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 3 of 8

4 Just-concluded 2018 FIFA World Cup. To monetise its sports package, Astro allowed FIFA World Cup streaming by non-astro customers through Astro GO (OTT) and NJOI Now apps via the purchase of World Cup pass. Selected matches were also available for free on Astro Arena via NJOI Now and Astro GO apps. That said, we do not expect Astro to deliver exciting numbers on the back of this given the higher content cost, increased number of World Cup matches broadcasted on RTM and free streaming provided by illegal online streaming and gaming operators which may have impacted its viewership and adex collections. Note that RTM got the World Cup FTA broadcasting rights to air 41 FIFA World Cup matches (27 live and 14 delayed), an increased from the last round of 35 matches (24 live and 11 delayed) in Content remains the key attraction. Content is not only the primary attraction that keeps subscribers onboard but also the key driver for TV adex. Going forward, sports and local content will continue to be Astro s key differentiating factors against its international peers. In addition, Astro has partnered with Kumpulan Media Karangkraf Sdn Bhd (Karangkraf) to pursue co-creation of content intellectual properties (IPs) across Malay and Islamic verticals to tap on the opportunities in Malay digital content network as the Group believes the vernacular digital space is currently underserved. Growing demand for esports content. We are also impressed with Astro s esports channel (launched in June 2016), the first in Southeast Asia to offer esports tournaments, a growing global phenomenon among the millenials. The esports business is estimated to be worth USD1.5bn by 2020 and is currently been explored to be included as an Olympic sport by Based on global statistics, the number of frequent esports viewers is expected to reach 250m in 2021 (2017: 143m viewers). Astro has plans to partner with main game organisers and developers to bring live global tournaments and on demand content. Regional, Singtel has started to expand into esports this year, in a bid to grow its gaming and digital content business across its footprint in Asia Pacific. Lower dividend payout, but attractive yield. Astro declared a lower dividend per share of 2.5 sen in 1QFY19, with management also guiding for a lower quarterly dividend of 2.5 sen for the subsequent quarters, which is lower than the 3.0 sen interim dividend paid out in each quarter of FY18. As such, we lower our dividend payout assumption to 80% for FY19-21F. While Astro plans to reduce its dividend payout to reinvest in digitalisation and local and Nusantara content IPs, the dividend yield is still attractive at c.6% p.a. Convergence as the best option Maxis-Astro merger? In light of the changing technology and media landscape and threat from the cord-cutting trend, consolidation of media and telecommunications companies have become a global trend as much as it is a growing necessity. Recent examples are the acquisition of Time Warner by AT&T, and the bidding war between The Walt Disney Company and Comcast Corp to buy 21 st Century Fox and Sky Plc. Hence we are not surprised by news reported by the media that T. Ananda Krishnan, the single largest shareholder of Maxis (62.4%) and Astro (24.0%), may be looking at a corporate exercise involving the two entities to strengthen their positions in the evolving landscape = 3? With the digital revolution disrupting the media industry and the telecommunication sector also facing challenges in growing their business in a saturated market, we believe a merger could benefit both parties. Merging Maxis wireless and broadband networks with Astro s content offering capabilities and pay TV business would create convergence and thus, synergies to the enlarged entity. We believe the bundling of disparate communication, entertainment and utility services in a single package will be the direction where Malaysian telecommunications providers are heading in order to remain relevant in the fast-changing telecommunication and internet industry. 4 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 4 of 8

5 Potential share swap? Among the alternatives, we think, may be the offering a share swap to buy Astro through the issuance of new Maxis shares to Astro s shareholders in exchange for their shares. In this case, it would be an earnings-accretive acquisition to Maxis as its share price is valued at a higher P/E as compared to Astro. We believe the deal is likely to be priced at a premium to Astro s current share price in order to entice shareholders. We work out the potential impact of a merger deal (without taking into account the synergies that can be created post-deal due to insufficient data) (see Table 1). With reference to the recent global media M&As which are valued at 13x to 21x forward P/E multiple (see Table 3), we assume three scenarios for a potential merger between Astro and Maxis, valuing Astro at forward P/E multiple of 15x, 16x and 18x (which represents 10%, 20% and 30% premium to the last closing price). Based on our estimates, all three scenarios suggest positive results i.e. earnings accretive to the merged entity. Hence, we conclude that a merger between Astro and Maxis is favourable for both shareholders because 1) Astro shares will be priced at a premium in exchange for Maxis shares and 2) Maxis will benefit from earnings accretion and become the next convergence player in Malaysia after Telekom Malaysia. Post-merger, Maxis could potentially trade at a higher multiple (currently 23x forward earnings) for being a convergence player. Also note that our scenario analysis omitted possible synergies to be created i.e. revenue expansion through the bundling of disparate products & services and cost optimization through sharing/efficient use of resources. Nevertheless, we reckon that as the likely acquirer in this merger deal, the immediate reaction of Maxis share price may not be positive due to 1) premium offering for Astro shares and 2) low appreciation given to Astro for its content creation capabilities and how this could add value to Maxis mobile and fixed broadband business. We believe that valuation for the merged entity would improve over time once it delivers positive results in the future. Table 1: Potential Impact of A Merger Deal Pre-Merger Maxis Astro Last closing price RM5.60 RM1.81 Current share base 7,809m 5,214m Estimated net profit (CY19F) RM1,896m RM699m Estimated EPS (CY19F) 24.3 sen 13.4 sen P/E 23.1x 13.5x EV/EBITDA 10.7x 5.5x Key Assumptions Scenario 1 Scenario 2 Scenario 3 Astro: Estimated net profit (CY19F) RM699m RM699m RM699m Acquisition premium (based on last closing price) 10% 20% 30% Acquisition P/E 15x 16x 18x Acquisition price RM1.99 RM2.17 RM2.35 Share exchange ratio (Astro : Maxis) 0.36 : : : 1 Earnings Impact Astro: Estimated net profit (CY19F) RM699m RM699m RM699m Maxis: Estimated net profit (CY19F) RM1,896m RM1,896m RM1,896m Post-merger: Estimated net profit (CY19F) RM2,595m RM2,595m RM2,595m Maxis: Existing share base 7,809m 7,809m 7,809m Add: New shares issuance 1,877m 2,033m 2,190m Post-merger: Enlarged share base 9,686m 9,842m 9,999m Maxis: EPS (CY19F) 24.3sen 24.3sen 24.3sen Post-merger: EPS (CY19F) 26.8sen 26.4sen 26.0sen Change in post-merger EPS (CY19F) +2.5sen +2.1sen +1.7sen Change in post-merger EPS (CY19F) +10% +9% +7% Source: PublicInvest Research estimates 5 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 5 of 8

6 Table 2: Valuations for the Enlarged Entity Enlarged entity P/E valuation 25x 24x 23x 22x 21x 20x Scenario 1 (15x P/E, RM6.70 RM6.43 RM6.16 RM5.89 RM5.63 RM % premium) Scenario 2 (16x P/E, RM6.59 RM6.33 RM6.06 RM5.80 RM5.54 RM % premium) Scenario 3 (18x P/E, 30% premium) RM6.49 RM6.23 RM5.97 RM5.71 RM5.45 RM5.19 Source: PublicInvest Research estimates Table 3: Global Media M&As Valuations Acquirer Target Company Currency Acquisition Price Bloomberg Consensus Forecast (CY19F) AT&T Time Warner USD $ 85.4 bn $ 6.5 bn 13x The Walt 21st Century USD $ 71.3 bn $ 4.4 bn 16x Disney Fox Comcast Sky Plc GBP 26.0 bn 1.3 bn 21x Corp Source: Bloomberg, PublicInvest Research estimates P/E Maintain Outperform. Astro s share price has plunged close to 28% YTD mainly due to concerns over the declining pay TV subscriber base and subscription revenue and recent exclusion from the FBM KLCI index. We believe these negatives have already been sufficiently reflected in the share price, deeming Astro s valuations attractive at current levels with the stock currently trading at only 13.5x CY19F PER (more than 2SD below its 3-year historical average of 20.8x). We reiterate our Outperform call on Astro given its attractive valuation, decent dividend yield and on a possible merger with Maxis. Though Astro has clarified that it has not received confirmation of any privatisation proposal, we think that talks of a merger and/or privatisation by its major shareholder should lend some support to its falling share price. Also, we note that the single largest shareholder (T. Ananda Krishnan) has been buying Astro s shares in the market of late (Total shares bought since 13 June 2018: 4.5m). Figure 3: One-year Forward PER year Forward PER Average +1SD -1SD +2SD -2SD Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Source: Bloomberg, PublicInvest Research 6 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 6 of 8

7 KEY FINANCIAL DATA INCOME STATEMENT DATA FYE Jan (RM m) 2017A 2018A 2019F 2020F 2021F Revenue 5, , , , ,852.1 Gross Profit 2, , , , ,241.4 Operating expenses -1, , , , ,111.9 Operating Profit 1, , , , ,129.5 Net Finance Costs Pre-tax Profit , Taxation Effective Tax Rate 27.0% 28.8% 24.0% 24.0% 24.0% Net Profit Core Net Profit Growth Revenue 3% -1% 3% 1% 1% Gross Profit 2% 5% -3% 1% 1% Net Profit 1% 24% -13% 4% 3% Source: Company, PublicInvest Research estimates BALANCE SHEET DATA FYE Jan (RM m) 2017A 2018A 2019F 2020F 2021F Property, Plant & Equipment 1, , , , ,750.9 Cash and Cash Equivalents Receivables and prepayment 1, , , , ,210.3 Other Assets 2, , , , ,107.9 Total Assets 6, , , , ,316.9 Payables 2, , , , ,133.5 Borrowings 3, , , , ,591.7 Deferred tax Other Liabilities Total Liabilities 5, , , , ,244.3 Shareholders Equity ,072.6 Total Equity and Liabilities 6, , , , ,316.9 Source: Company, PublicInvest Research estimates PER SHARE DATA & RATIOS FYE Jan 2017A 2018A 2019F 2020F 2021F Book Value Per Share (RM) EPS (Sen) DPS (Sen) Payout Ratio (%) ROA (%) ROE (%) Source: Company, PublicInvest Research estimates 7 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 7 of 8

8 RATING CLASSIFICATION STOCKS OUTPERFORM NEUTRAL UNDERPERFORM TRADING BUY TRADING SELL NOT RATED The stock return is expected to exceed a relevant benchmark s total of 10% or higher over the next 12months. The stock return is expected to be within +/- 10% of a relevant benchmark s return over the next 12 months. The stock return is expected to be below a relevant benchmark s return by -10% over the next 12 months. The stock return is expected to exceed a relevant benchmark s return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call. The stock return is expected to be below a relevant benchmark s return by -5% or more over the next 3 months. The stock is not within regular research coverage. SECTOR OVERWEIGHT NEUTRAL UNDERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months. The sector is expected to perform in line with a relevant benchmark over the next 12 months. The sector is expected to underperform a relevant benchmark over the next 12 months. DISCLAIMER This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad ( PIVB ). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. 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