Thursday, November 22, 2012

What's NEXT For Astro ...

It beats several bidders to win the broadcast rights for the next three seasons of the EPL football matches at what is said to be a respectable cost increase to the previous three seasons.

It is understood that the amount is near rm1 billion for the three seasons up from the rm800 million Astro is said to have paid in the current three year season ending 2012/2013.

A substantial cost increase could further dent earnings for Astro, which is already guiding smaller margins year on year in the next two years from Nov 2012 as it spends to convert the remaining half of the 3.1 million subscribers it has to the next generation platform.

Rather than Astro losing the EPL broadcast rights, market observers are currently (Nov 2012) more concerned with the jump in cost, which could hurt dividend payments. Astro has promised to pay out at least 75% of its earnings as dividends to placate shareholders as it nurture new growth sources.

One way Astro could boost confidence is to show it can continue to deliver strong earnings while keeping a tight rein on costs, despite facing heightened competition.

Is It Worth Buying Now (22 Nov 2012) ???
ASTRO Malaysia Holdings Bhd had won the broadcasting rights for the Barclays Premier League (BPL) for the next three seasons starting from season 2013/2014. The broadcast rights is reportedly to cost near RM1bil, up from the previously reported RM800mil. However, ground check indicates that the actual cost for both current and previous deal is lower than those appeared in newsreports.
Nevertheless, expect the impact to Astro's earnings will not be significant.  Estimate that its content cost as a percentage of revenue will increase by 1% to 2%-points in financial year ending Jan 31, 2014 (FY14) from current 32%. This will be within the management guidance of circa 32% to 35%. In addition, content cost will only reach 35% of revenue in the year with major sporting event such as the World Cup and Olympics. Otherwise, content cost will range between 32% and 33% of revenue.
Hence its margin will be under pressure. Churn will be limited but sports are not the only reason. The impact to Astro will be positive as it will limit the churn rate of its subscribers. Current churn rate as at calendar year 2011 (CY11) is 7%, which is well below the industry average of 13%. With BPL rights, churn rate can fall to the 5% to 6% level. However, regardless of the sporting content, Astro's churn rate will also be limited by its local and international offerings.
Astro's wholly-owned subsidiary, MEASAT Broadcast Network Systems Sdn Bhd (MBNS), has received a letter from the Indonesian Embassy in Kuala Lumpur on Nov 14 2012 naming MBNS as second defendant with respect to a claim made by PT Direct Vision (PTDV) for an unlawful act or tort in the District Court of South Jakarta, Indonesia, against Astro All Asia Networks Plc. The on-going dispute with PTDV will not have an impact to Astro as its operation is solely focus in Malaysia .
The current (Nov 2012) content cost is within management guidance. The winning bid for BPL should remove a lot of uncertainty for Astro and at current price level (rm2.65 – rm2.72) is an attractive entry point for investors to accumulate on Astro's shares.
Astro aims for a dividend payout ratio of 75% will be an added incentive for investors.
The main investment cases for Astro are as follows: Astro has room for growth given that Malaysia pay-TV market penetration rate is only at 50% and it is the leader with market share of circa 99%; popular in-house content and international content which will limit the churn rate and entice new subscribers; increasing income level in Malaysia will consequently increase its average revenue per user (ARPU) as subscribers upgrade its packages; new products that can tap previously underserved market; innovative product to maximise ARPU.
By OSK (NO) …

Content has been the largest component of the group's cost of sales, comprising 54.4%, 55.1% and 51.6% of its pro forma cost of sales for the financial years ended Jan 31, 2010, 2011 and 2012 respectively, as well as 52.1% of its audited cost of sales for the three months ended April 30, 2012.

Despite the decrease in content costs as a percentage of total operating costs, its content costs have increased in absolute amount primarily because of the addition of new channels to expand our channel offerings, the addition of high definition (HD) channels to increase our HD penetration, the increase in content prices due to inflation and the increase in local production.

The cost of winning the BPL is likely to have an impact on Astro's earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins for the next two to three years from Nov 2012.

Also expecting a slight impact on the company's dividend payout in the near term or thr next two years.
However mariket observers did not rule out a potential subscription price hike to pass on some of the costs to viewers.

Since 1997, Astro has been showcasing BPL action as part of a comprehensive bouquet of football programming to Malaysian football fans.

Meanwhile, it will be interesting to see if Astro would be mandated to share its content with other players. According to reports, a policy directive to ensure certain types of popular content, such as some live sports, is not bought on an exclusive basis by any television station in the country, is expected to be issued.

This is said to pave the way for joint bidding for live sports content by all the players or, if only one player bids for it, the concept of sharing popular content with all the players will be possible.

The directive is said to address the concerns and comments made by industry players that claim that when only one broadcaster gets all the exclusive content, it allows it to keep its market dominance and the exclusivity blocks the prospects for new entrants.

By Mercury Securities (NO) …

The share price would not revert its offer price or higher (on news of it securing the broadcasting rights). The public already expected Astro to be given the exclusive rights.

The management had already factored in the fee for the rights which is said to be about rm1 billion before the IPO.

Apart from current (Nov 2012) cautious market sentiment, the expensive valuation has also put a cap on Astro’s share price. Furthermore, the company cannot afford a generous dividend as it is incurring large capex as it migrates customers to the new Beyond set up boxes.

The Astro’s management said that for the next two or three years from Nov 2012, Astro should see a 2% to 3% contraction in Ebitda margin.

However it is a wise long term investment on the group’s part to raise profitability.

More than 93% of Astro’s revenue is derived from its pay-TV segment with is current (Nov 2012) Arpu standing rm83.00.

Fro the near term, Astro has no catalyst insight.

Astro venture into IPTV broadcasting – with its mobile Astro On the Go service and strategic collaborations with TIME dotcom Bhd and Maxis as well as it no frills prepaid satellite broadcast service – could potentially be a new growth area for the group and could elevate its pay TV market supremacy. Astro has the exclusive rights for the satellite DTH broadcast service in the country until 2017 until that does not mean it will not face competition.

Astro’s management said that it would face no competition in the foreseeable future. However, that is only partially true as it does not have any competition only within the satellite television service.

The exclusive rights do not guarantee that audiences will only watch Astro. As high speed broadband (HSBB) is becoming increasingly ubiquitous in Malaysian households, Internet users can immediately download or stream any programming to view it a their convenience. Thus Astro’s PVR service, which allows viewers to record and watch a programme later loses some of its appeal.

Another potential competitor for Astro is the cable TV provider ABN which is currently (Nov 2012) doing a test run in the Klang’s Valley.

Meanwhile Astro is only known for its monopolistic business model which provides resilient recurring cash flow, and is well run by a capable management team.

In the long run, there might be an intense war among broadcasters for audiences. But for now (Nov 2012), Astro will continue to dominate.

Philip Capital (NO) …

Astro is a well run company. The current (19 Nov 2012) capex is necessary as it will set a platform for the group’s future earnings growth.

Nonetheless it does not see the share price weakness (19 Nov 2012) as a buying opportunity but until the group starts paying dividends.

The IPO valued the stock as a PER of 32 times based on projected EPS of FY2013. The media industry’s average PER is 18.26 times.

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