Astro IPO: Mixed views

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Some fund managers are concerned about lack of growth prospects while others are bullish

PETALING JAYA: Fund managers and analysts are mixed on whether to subscribe for the comeback initial public offering (IPO) of Astro Malaysia Holdings Bhd..

On the one hand, some fund managers have expressed concern about Astro’s valuation being toppish and its lack of growth prospects in Malaysia.

But two investment bank reports sent to clients and obtained by StarBizwere more bullish in their assessment.

One of the reports highlighted that Astro’s average revenue per user (Arpu), an important indicator of profit potential, has been rising.

As of the first quarter of financial year 2013, Astro had an Arpu of RM91, which has risen by 5%, 4% and 3% in the past three years respectively.

The Arpu rise, the report said, was driven by Astro’s increased high-definition (HD) penetration.

Astro was the first to broadcast HD in Malaysia when it launched its Astro B.yond service in 2009. Astro aims to have 100% HD installation by Jan 2015.

Meanwhile, another investment bank said that Astro was being relisted without its loss-making operations, for example the library licensing business and its 20% stake in India’s Sun Direct TV, which generated operating losses of RM61.5mil and RM81mil respectively in FY10.

In the past, with these loss-making operations, Astro had struggled to maintain its Arpu above RM80 and to keep its churn rate below 10%, the report said.

“After Astro launched its plethora of value-added services such as Astro B.yond HD, PVR (personal video recorder), IPTV (Internet protocol television) and Super Packs beginning Dec 2009, its Arpu has begun to steadily growing to RM89 in FY12 and in the first quarter of FY13. Its FY12 churn of 6.6% is also the lowest in nearly 10 years,” said the report.

Another positive factor that one of the investment bank reports stated was this: “Malaysia’s pay-TV segment has grown consistently over the past five years, with average subscriber growth of 8.2% and subscription revenue of 11.7%, defying the macro-economic cycle.

“Going forward, we expect Malaysia’s pay-TV subscriber base to register an average growth rate of 11%, translating into household penetration rate of 62% by Dec 2015, of which we expect Astro to capture an 89% market share”.

Coupled with a sustained Arpu growth, the investment bank forecasts Astro’s pay-TV subscription revenue to reach RM4.5bil by FY15, representing an average growth of 14% between FY13 and FY15.

However,MIDF Amanah Asset Management Bhd chief executive officer Scott Lim said he was unlikely to subscribe to Astro shares.

“The business growth in the last few years has been very slow. Lately too, there is compression on the margins. For example, to sustain its numbers, Astro is lowering the price of the second decoder. There used to be a 50% discount if you had a first decoder. Right now, the price of the second decoder has been lowered to RM50,” said Lim.

A media analyst agrees, saying that operating margins are going to be slightly lower as Astro is targeting to convert its remaining subscribers to high-definition set-top boxes. So far, it has converted some 1.3 million subscribers and has another 1.5 million subscribers to go.

The entrance of more IPTV players also spells more competition.

“The golden days of pay-TV is over with impending competition from IPTV players and digital cable players like Asian Broadcasting Network. This means that Astro will no longer have the monopoly of content.

“So, moving forward, there will many different channels to distribute content. You cannot price people out of competition anymore,” said Lim.

Nonetheless, Lim feels that the commercial launch of LTE (long-term evolution)/4G by year-end will escalate the distribution of content even on mobile platforms.

“Watching content will no longer be through Astro and traditional landlines. It is with these concerns that I feel valuations will not hold. Yes, the company may be giving dividends but I don’t think it is enough,” said Lim.

The media analyst added that there were presently some 11 IPTV licence holders in Malaysia, although not all of them were active.

“To be fair to Astro, so far there is no sustainable competition. Astro also has the right people in management who have the track record and have so far delivered,” said the media analyst, adding that Astro’s advantage was that it could bundle its pay-TV packages with its IPTV offerings.

Set to be Malaysia’s third largest IPO this year after FGVH and IHH Healthcare Bhd,  Astro is expected to raise some RM5.47bil from the sale of 29.2% of the company’s or about 1.52 billion new and existing shares.

At an indicative price of RM3.60 (this is the price that has been set for bumiputra investors) and based on its earnings of RM629.6mil for its financial year ended Jan 31, 2012 (FY12), this translates to a price-earnings ratio of 38 times.

For Fortress Capital Asset Management (M) Sdn Bhd chief executive officer Thomas Yong, he too will not be subscribing for Astro shares as he doesn’t see much growth prospects.

“At RM3.60, the price-earnings ratio is more than 30 times and the dividend yield is only 2%. To ensure that the dividend yield stays at 2%, they need to have a payout ratio of 2%,” said Yong.

Astro is being listed without its Indian and Indonesian operations at RM18.7bil, which is 125% higher than the RM8.3bil the old Astro All Asia Networks plc was privatised two years ago at RM4.30.

Astro today has 3.1 million customers, which account for about 50% of Malaysian households and 99% of the residential Pay-TV market. Astro Malaysia intends to invest RM1bil annually in content.

“By ethnicity, Malays and Indians watch the most TV at an average of about four hours every day. As Malays are heavy TV consumers, Astro has been recalibrating its content portfolio to meet their demands,” said one of the investment bank reports.

It added that the average Malay household grew the fastest at an average rate of 9% from 2007 to 2011.

The research house expects the Malay and rural households to drive subscriber and Arpu growth, moving forward.

Astro recently signed a strategic partnership agreement with Maxis, enabling it to broadcast television content on Maxis’ IPTV.

The mutually-exclusive partnership means that Maxis will become Astro’s exclusive partner for B.yond IPTV while Astro will be the exclusive IPTV provider for Maxis. – The Star