KUALA LUMPUR: Astro Malaysia Holdings Bhd
’s free cashflow may not be severely strained in the current environment of strong US dollar and rising interest rates, says CGS-CIMB Research.
The research house said less than half of Astro’s US dollar-denominated borrowings have yet to be swapped to ringgit and most of its borrowings are made up of fixed-rate loans.
“Astro has also lowered its content cost exposure to the greenback from as high as 70%, to around 50% currently. It can also cycle out its content if need be,” it said in its latest report.
“In our view, the eroding share price over the past month has more than reflected the effects of rising interest rates and weak ringgit,” added the research house, which maintained its “add” call on the stock with a discounted cashflow-based target price of 88 sen.
Of Astro’s RM3.6bil borrowings as at end-July 2022 (including RM8.7mil in accrued interest), US$333.1mil (RM1.5bil at end-July 2022) or 41.8% was denominated in US dollars. These are for the new transponder lease agreements that Astro has yet to swap to ringgit.
“It will take time for Astro to get the necessary approvals for the conversion,” said CGS-CIMB Research.
As for borrowings with floating interest rates, they amounted to only RM322.5mil or 9.1% of total debt and the group also tends to refinance its loans as they near their maturity.
The research unit has raised its finance cost assumptions for Astro by bringing up the effective interest rate from 4% to around 6% to 6.1% for Astro’s financial years ending Jan 31, 2023 to 2025 (FY23 to FY25).
As a result, CGS-CIMB Research’s estimated earnings per share for Astro’s FY24 and FY25 are cut by 1% to 9%.
The downside risk is that Astro’s subscription revenue will be squeezed further, while a stock re-rating catalyst would be new tentpole streaming services joining Astro’s distribution network.
On how how Astro has been able to keep its content costs in check, CGS-CIMB Research noted that in the first few years after the group was re-listed in October 2012, its content costs were split almost equally among three major categories namely local, international variety and sports.
Only the local content category is transacted in ringgit.
This put the share of content denominated in US dollars at 66% then, and this could leap as high as 70% in certain years.
Yet, while the ringgit’s value against the US dollar has fallen by over 50% since its re-listing, Astro’s content cost did not escalate.
“If there is a blessing in disguise from the digital insurrection, it is that it allowed Astro to negotiate lower fees for broadcasting rights, as these programmes cannot get cord-cutters to change their minds.
“The share of US dollar-denominated rights fees consequently fell to around 50% of its aggregate content cost,” it said.
For some agreements, Astro has a clause that stipulates the content owners bear exchange losses if the ringgit drops to a certain level.
The research unit’s FY23 to FY25 content cost assumptions are also at the high end of the 35% to 37% cost-to-TV revenue ratio that the group has adhered to over the years, at 37% to 38%, to factor in the strong US dollar.
