News of a possible capital and organisational restructing plan for Astro All Asia Networks plc kept the media company on investors’ radar screens recently, but last Thursday Astro surprised the market by announcing that it is accelerating spending to introduce high-definition television (HDTV) in Malaysia .

“In the current year, we will invest an additional RM200 million (RM100 million on capital expenditure and RM100 million on operating expenditure) to deliver broadcast of HDTV to retain our market leadership in Malaysia,” Rohana Rozhan, Astro TV’s CEO, said in a statement.

More importantly, these accelerated investments “will have a significant impact on (Astro’s) current year margins” as it adds “expense cost ahead of any revenue”, she said.

The RM200 million expenditure on HDTV is on top of the RM350 million in capex that Astro is already spending this year.

Small wonder that Astro’s share price, which shot up 7.4% to RM3.76 ahead of the release of Astro’s 2QFY2010 earnings last Thursday evening, fell 4.4% on Friday to end the week at RM3.49.

“Disappointingly, management did not offer any insight to a purported corporate exercise articulated previously,” says OSK Research in a note.

Astro proposed a dividend of 2.5 sen per share for 2QFY2010, the same as the previous quarter, and said the group would continue “to pursue a progressive dividend policy which seeks to balance long-term capital growth and immediate cash returns”.

There had been speculation that Astro shareholders would get as much as RM1 a share from a corporate proposal that is still being firmed up to hive off its still loss-making foreign assets to its main shareholders, billionaire Ananda Krishnan and Khazanah Nasional Bhd.

In response to news reports, including one by The Edge headlined “Astro to sell Indian unit”, Astro’s board said on July 20 that it was “considering various options to restructure the company to achieve a more efficient capital and corporate structure”, that it had appointed advisers and was evaluating “certain proposals”. No additional announcements have been made.

Sentiment was also weighed down by 2Q numbers that came in below estimates and expectations on several fronts. Bottom line-wise, higher finance costs during the quarter negated the higher Ebitda q-o-q.

Analysts also frowned on Astro’s smaller subscriber net additions — 53,000 was the lowest in eight quarters (since 2QFY2008 with 28,000 users). The bigger disappointment was the 2.5% q-o-q slide in ARPU (average revenue per user) to RM78 — falling below the RM80 mark for the first time in nine quarters, since 1QFY2008 with RM77.3.

However, Astro maintained guidance for ARPU to be at RM80 a month for FY2010 and expects ARPU to improve in FY2011, aided by HDTV as well as a higher take-up of its sports package, for which prices were upped by RM12 on Aug 1.

OSK Research expects ARPU to pick up again in 3QFY2010, following the subscription rate hike for its sports package, coupled with the impact of the take-up of the recently launched Mustika service pack.
Not everyone agrees. An analyst with a foreign brokerage house, when contacted, questioned the take-up for HDTV in Malaysia, and how much benefit Astro would see from the accelerated spending.

It is learnt that the RM200 million investment that Astro is making on HDTV this year is only “for starters”. More money will be required to convert its 2.78 million subscribers to the new platform.

“If you were to assume a RM500 (subsidy) per set-up box, converting 1.5 million subscribers could cost some RM750 million over the next three years,” an industry expert tells The Edge.

Does the accelerated spending as well as take-up risk in HDTV reduce the likelihood of Astro paying out more in dividends to shareholders? What about the possibility of the company hiving off its Indian unit?
“Logic says higher spending needs mean less spare cash (to return to shareholders),” says the industry insider.

CIMB Research estimates that Astro could return “as much as 67 sen per share” if it recovers its RM580 million (about 30 sen a share) cost for its 20% stake in Indian associate Sun Direct TV. “Astro’s current cash level (RM912 million) can only support a special dividend of 37 sen a share after taking into account normal dividends,” says CIMB in a note.

“With the Malaysian cash flow, Astro could still position itself as a yield stock should it hive off its foreign assets, which gives long-term growth prospects… the question is how much can the assets fetch for the proposal to be a win-win?” asks an analyst with a foreign brokerage house.

The analyst is more concerned with the accelerated spending on HDTV as well as another risk to Astro’s share price over the medium term: the outcome of Astro’s upcoming bid for the 2010/2012 English Premier League (EPL) broadcast rights.


This article appeared in The Edge Malaysia, Issue 772, Sep 14-20, 2009.