Analysts cut earnings forecast for Astro as challenges mount

KUCHING: Analysts have cut its financial year 2019 (FY19) and FY21 forecast for Astro Malaysia Holdings Bhd (Astro) by 20 to 29 per cent, amid continued pressure on the pay-TV industry.

In a report, the research arm of AmInvestment Bank Bhd (AmInvestment) said: “We have cut FY19F-FY21F earnings by 20 to 29 per cent amid continued pressure on the pay-TV industry due to content piracy and illegal TV set-top boxes and an increasingly competitive landscape for its over-the-top (OTT) offerings.

It noted that Astro faces persisting competition from OTT, iPTV and illegal TVs.

“The group could face intensifying competition as high-speed internet improvements boost content streaming and could increase the demand for popular OTT alternatives such as Netflix and HBO Now,” it said.

However, it pointed out that high-speed internet remains under-penetrated in rural areas, which could momentarily churn in Astro’s pay-TV subscriptions and provide it with a window for business transformation.

Aside from that, AmInvestment highlighted that Astro faces higher content costs for the year, despite the stronger performance of the ringgit.

“Astro’s content costs make up 29 to 32 per cent of the group’s total revenue and 70 per cent of these are international/sports programmes which are US dollar-denominated.

“Therefore, the group is a net beneficiary of a strengthening ringgit. The ringgit strengthened against the US dollar by nine per cent year-on-year (y-o-y) from 4.3598 in 1HFY18 to 3.9536 in 1HFY19.

“However, content costs are higher for years with major sports events at around 36 to 37 per cent of TV revenue vs 32 to 24 per cent in non-sports years,” it explained.

AmInvestment also said that despite Astro’s efforts to strengthen its commerce, OTT offerings, and digital initiatives to offset the decline in its subscription earnings, the weaker subscription earnings could still continue to pose a drag on the group’s profitability.

The research team said, this challenge could persist unless it manages to leverage on its dominance in household penetration and provide personalised.

Despite the mounting obstacles Astro faces, AmInvestment noted that Astro has stronger vernacular and local content creation thanks to its joint venture (JV) with Karangkraf Digital 360 (KK360), known as Nu Ideaktif.

It said, the JV is expected to generate new revenue across Astro’s multiple platforms such as TV, OTT and digital, and support the expansion of its regional OTT, Tribe.

AmInvestment also pointed out that Astro’s NJOI is expected to drive TV household penetration.

“The growth in NJOI’s base will also broaden the reach of the company’s commerce arm, Go Shop, and bodes well for its pay-TV base as it provides an upsell pathway to its pay-TV platform,” it explained.

Astro’s FY19 is also expected to lifted by events which are set to boost its viewership and advertising expenditure (adex).

The research team noted that these events include the FIFA World Cup 2018, news coverages for the 14th General Election, and the upcoming 2018/2019 English Premier League (EPL) which is expected to be broadcast in Ultra HD in October.

There is also the potential upside to analogue switch-off (ASO).

AmInvestment noted that although the ASO is being delayed to 1QCY19, it believed it might create opportunities for Astro to increase NJOI’s household penetration as it offers the highest number of free TV and radio channels when compared against MYTV and Unifi TV.

It noted that there are also plans to replicate its household reach onto the individual space via its analytics-driven approach, in order to improve “discovery of content” via personalised UI/UX interface for each household member and content portability for seamless viewing across personal devices.

Overall, based on the issues faced by Astro, AmInvestment downgraded its call to ‘hold’ from ‘buy’.

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