(Oct 21): Some members of the investment community have relayed their concerns over Astro Malaysia Holdings Bhd’s dividend sustainability, and the ability of the group to uphold its commitment to distributing at least 75% of its annually reported net profit to shareholders. These are understandable concerns, given that Astro has plenty of financial commitments denominated in US dollars.

In the first few years after Astro was relisted in October 2012, its content costs were split almost equally among three major categories: i) local content; ii) international variety content; and iii) sports content. Only the local content category was transacted in ringgit. This put the share of content denominated in US dollars at about 66% then, and it could leap as high as 70% in certain years. Yet, while the ringgit’s value against the US dollar had fallen by over 50% since its relisting, Astro’s content cost did not escalate. If there was a blessing in disguise from the digital insurrection, it was 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 about 50% of its aggregate content cost. For some agreements, Astro has a clause that stipulates the content owners bear exchange losses if the ringgit drops to a certain level. Our content cost assumptions for the financial year ending Jan 31, 2023 (FY2023) to FY2025 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.

Of the RM3.6 billion borrowings at end-July 2022 (including RM8.7 million in accrued interest), US$333.1 million (RM1.5 billion 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. As for borrowings with floating interest rates, they amounted to only RM322.5 million or 9.1% of total debt. The group also tends to refinance its loans as they near their maturity. To be more thorough with our FY2023-25 forecasts, we have raised our finance cost assumptions by bringing up the effective interest rate from 4% to 6%-6.1%. Our FY2024-25 earnings per share forecasts are cut by 1%-9% as a result. We are of the view that Astro’s free cash flow may not be severely strained in the current environment. Downside risk: Subscription revenue squeezed further. Rerating catalyst: new tent-pole streaming services joining Astro’s distribution network.