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Getting more than it bargained for

■ Astro is bringing in 13 new television channels to replace the 11 channels owned by The Walt Disney Co which will go off-air at end-Sep 2021.
■ In our view, this is more a testament to the global media corporations relying on Astro to get their direct-to-consumer (DTC) projects to work.
■ Although Astro is getting more channels and streamers from Hollywood giants, its content cost-to-TV revenue ratio should remain at 34-37%.

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11 channels out, 13 in

On 15 Sep, Astro Malaysia (Astro) announced that 13 new international content-oriented channels are joining its distribution lineup (see the complete list on pages 2-3). Most of the channels went on air immediately, with the rest coming in Oct. These channels are meant to make up for the 11 channels owned by The Walt Disney Co (DIS US; Not
Rated) and Fox Networks Group Asia Pacific’s (Unlisted), which will bow out after 30 Sep 2021 as part of the media giant’s effort to reduce its exposure to linear broadcasting in international markets. Three of the four upcoming in-house channels — Astro SuperSport 5, Showcase Movies, and PRIMEtime — will pick up Disney-owned and third-party
programming that are currently aired on Fox networks.

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What’s good for Astro is good for Hollywood studios

On the surface, Astro’s move to replace the lost Disney-Fox channels seems like the pay television operator is clutching at straws to keep its subscribers from fleeing. Yet we see it as the Hollywood studios doing everything to bolster Astro’s content proposition. The group has said that the changes in its channel lineup and the addition of 15 subscription-based video-on-demand (SVOD) services by end-FY1/23F will not cause the group’s content cost-to-TV revenue ratio to breach the self-imposed ceiling of 34-37%. Hence, Astro has been getting more for less from the Hollywood studios over the years — considering that its content cost has remained stable since its Oct 2012 re-listing. It is the international media giants that have more to lose if piracy upends their streaming gambit in Asia. The video streaming market surfeit and subscriber fatigue are slowing down their growth in the US, yet they continue to be mounted by high production costs to satisfy subscribers’ demand for content. We also believe Astro decided to replenish its channel count rather than taking this as an opportunity to cut its content costs further because
there are still viewers who prefer to watch whatever is on TV vs. having to choose what to watch. This is why Netflix (NFLX US; Not Rated) is testing out a linear channel in France.

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Reiterate Add

Astro is trading at a 74.9% discount to the global pay-TV and streaming players’ weighted average CY21F EV/EBITDA of 23.1x. The CY21-22F yields of 8.1-9.7% are unrivalled by peers, which averaged at 0.6%. In our view, Astro’s digital convergence strategy ought to narrow down its discount to its peers. With the streaming integration and international
media giants’ backing against piracy, we are hopeful that an earnings resurgence is in sight. Maintain Add with a DCF-based TP of RM1.51 (WACC: 9.3%). Potential re-rating catalyst: a reversal of its subscriber base.