Wednesday, January 2, 2013

Astro Malaysia Holdings Bhd.

A fundamental research report and a technical report for Astro Malaysia Holdings is review from OSK Investment Bank research team recently, Astro share price is trading below its IPO price of RM3.00 to-date except on its debut day of the IPO. Let's see how OSK evaluate Astro on its 26th December 2012 reports,

We keep our BUY call on Astro with RM3.40 FV, based on FCFF valuation (WACC: 8.45%,  TG:  1.5%).  We  continue  to  like  the  company  as  it  is  the  largest  pay-TV operator in Malaysia and has a de facto monopoly, commanding 95% of the market. It  also  enjoys  huge  room  for  growth  given:  i)  the  low  existing  pay-TV  household penetration rate of only 50%, ii) a potential uptick in ARPU as subscribers migrate to  the  HD  platform,  iii)  its  superior  content  in  156  TV  channels,  and  iv)  high  entrybarriers to the pay-TV industry due to significant economies of scale.

Positive  HD  take-up  enhances  ARPU.  The  take-up for Astro's HD services has been encouraging  so  far,  with  65%  of  its  customers  with  B.yond  set-top  boxes  (STBs)  having subscribed  for  HD  content  in  3Q13.  We  are  optimistic  about  Astro's  progress  in  this segment  given  that  it  could  fetch  an  incremental  ARPU  of  RM20.  Currently,  1.8m households  have  already  migrated  over  to  the  HD  platform  (55%  of  Astro's  pay-TV subscriber  base)  and  management  intends  to  swap  out  most  of  its  legacy  SD  STBs  by end-FY14.  Although  the  initiative  may  hurt  its  bottom-line  in  the  short  term,  we  think  it commensurates  with  the  returns  obtained  over  the  longer  time  by  securing  a  larger stream of recurring revenue. With the aid of aggressive marketing and advertising efforts, we foresee Astro succeeding in its upgrading plan.

Potential benefits from collaborating with telcos. Astro's recent partnership with Maxis and Time dotCom to provide IPTV services to the masses could provide a new avenue of growth.  We  think  the  newly  offered  triple  play  packages  (bundling  of  voice,  broadband and  IPTV  services)  could  stir  new  interest  by  offering  a  one-stop entertainment/communication  product  to  consumers.  Furthermore,  we  reckon  fibre  is  a cheaper and more efficient alternative to broadcast content compared to the conventional satellite method, as the capex for fibre is borne by telcos.

Competitors are not assassins. Astro enjoys a monopoly on the pay-TV industry with a market share of more than 95%. Its only competitor currently is Telekom Malaysia's Hypp-TV. However, Asian Broadcasting Network (ABN) Media Group, a newcomer in the pay-TV market, is lookingto challenge the incumbent with grand and ambitious plans in mind. Regardless of how ABN ups the ante against Astro, we do not foresee the latter faltering and surrendering market share given its strong brand and resilient ecosystem, which took the company many years to establish and nurture.

At the technical side, OSK have this to say on its 2nd January 2013 report,

Astro should rise further if it can close above the RM3.00 resistance level,  at  which  a  position  can  be  initiated  if  this  happens,  with  a close below RM2.90 as stop-loss. The price target is RM3.20, should the intraday high of RM3.11 be broken. Failure to get above RM3.00 will likely see the stock go lower, with supports seen at RM2.75 and RM2.60.

The report is base on the chart that show its closing of RM3.00 on the 31st December 2012, which for those who monitoring this stock on that day, may notice that the closing of RM3.00 is push up last minutes during pre-closing session, most of the time the price actually hovering at RM2.92 to RM2.95 on that day.

For the valuation wise, if one just using the normal PE valuation, it seem Astro trading at a very high valuation, since OSK is using FCFF valuation for Astro, one should check what is all about FCFF and do you feel comfortable with this valuation on this Company.

FCFF definition under Investopedia website,

Definition of 'Free Cash Flow For The Firm - FCFF'

A measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments.

Calculated as:

Free Cash Flow For The Firm (FCFF)

Investopedia Says

Investopedia explains 'Free Cash Flow For The Firm - FCFF'

This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health.

A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. In that instance, an investor should dig deeper to assess why this is happening - it could be a sign that the company may have some deeper problems.

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