Business





Saturday May 17, 2008

On overdrive

By TEE LIN SAY


Rumours resurface on privatisation of Astro

IT is a rumour that doesn't seem to want to expire – the privatisation of direct-to-home satellite TV provider, Astro All Asia Networks Plc. Over the week, it resurfaced – for the third time, in eight months, despite denials from the company.

But based on the volume of its shares traded that appears to be building up, many observers reckon that something big is cookin'.

It was speculated in a financial blog that the share price could be moving due to a much bigger exercise such as the purchase of a stake in Hong Kong-listed TVB.

On Wednesday, TVB said Shaw Holdings Inc, which owns Shaw Brothers, a substantial shareholder in TVB, is in talks with interested parties regarding a possible sale of its shares in Shaw Brothers.

TVB is 26% owned by Shaw Brothers (Hong Kong) Ltd, the film company owned by TVB's largest shareholder Sir Run Run Shaw.

If this is true, an analyst says, it is a major investment and one which would have a significant impact on Astro, which as it stands, already has a good rapport with TVB (Astro's Celestial Pictures had bought the 760 movie library from Shaw Brothers).

In the absence of information however, the market has adamantly been churning out the possibility of a privatisation, which is easier to speculate at this point, considering that it is not an unfamiliar word as far as the stable of companies controlled by tycoon T. Ananda Krishan is concerned.

The major privatisation of telco Maxis Communication Bhd last year took everyone by surprise.

Substantial shareholder Employers Provident Fund (EPF), as of May 5, owns 106.69 million shares or a 5.52% stake in the company. Presently, Usaha Tegas owns some 25.1% of the company, while Khazanah Nasional Bhd has 21.5% stake.

Astro is a cash rich company with zero debts, strong cash flows and plans to expand overseas. Like Maxis, Astro is also facing uncertainties surrounding its investment in new markets, and possibly substantial capital spending moving forward.

At present, the steady cash flow from the dominant pay-TV provider's Malaysian operations is being used to fund its expansion in India and Indonesia.

It is a known fact that Astro isn't getting the valuation it deserves with its current listing status.

Most analysts feel that even when valuing Astro on its Malaysian business alone, the stock should be easily worth anything between RM4.20 to RM5.22.

An analyst who has been following Astro for some time, opines that there is a high chance of the privatisation happening.

“Astro is in a stage where they are experiencing more volatile earnings. People buy Astro for a certain reasons, for instance dividends.

The mindset of the investor will not be changed and cannot be changed. If the company remains listed, it will be punished every time it delivers patchy results.”

He notes that there is a trend in the companies that Ananda takes private. These companies are expanding to new countries with low penetration rates. Nonetheless, the initial years will be tough and losses need to be incurred. Investors may not be able to stomach these ups and downs.

AmResearch senior analyst Chong Tjen-San says that the possibility of a privatisation exercise is definitely there, although he feels it is unlikely if one considers the costly privatisation of Maxis of some RM16bil.

A telecommunications analyst adds: “Astro shares are undervalued now. It would definitely be value add to privatise it. The market certainly isn't giving them the due valuation they deserve too,” he says.

Another analyst however disagrees.

He personally feels that Ananda's present concentration is more towards Maxis.

According to reports, Maxis is expected to be spending to the tune of US$5bil for its expansion into India.

This would leave limited funds for Astro's privatisation.

Should Usaha Tegas decide to buy out its shareholders at a price of RM4.50, this would translate into a back of an envelope cost of RM6.5bil, which is steep although less pricey than the Maxis deal.

While some may argue that Astro's cash flows aren't enough to fund that huge sum needed, others say anything is possible when it comes to the Usaha Tegas group.

“I don't think it is too expensive to take it private. Debt is now cheap, and Ananda's name is strong. I am sure there are many private equity funds that are more than willing to fund him,” says the analyst.

While Chong acknowledges concerns on Astro’s loss-making overseas ventures especially Indonesia which has been in limbo, he feels that the market is discounting Astro's strong free cash flow generating monopolistic Malaysian business.

The Malaysian operations are now generating RM400mil to RM500mil in free cash flow and has been recording strong net additional subscribers in the last few quarters. For its year ended January 2008, Astro recorded total net additional subscribers of 256,000.

Astro is also making headway into the Malay market without compromising its Average Revenue Per Use (ARPU).

Chong values the Malaysian business at RM5.22 per share based on discounted cash flow.

After taking into account its loss-making Indonesian and Indian operations, he derives a sum of parts target price of RM4.42.

Despite the endless problems in its Indonesian operations, the majority of analysts polled on Bloomberg have a buy recommendation on the stock. Twelve analysts have a buy call, eight a hold and only one a sell.

The company's Indonesian operation is reason for some concern.

Not too long ago, there was service disruption of its Indonesian broadcast unit, PT Direct Vision for 4 days.

It was also reported in the Indonesian media reports that Astro was facing monopoly allegations from the Business Competition Supervisory Commission.

The greatest uncertainty however, lies in the status of talks with Astro's joint-venture Indonesian partner, The Lippo Group, on the shareholding status of Astro Indonesia.

To recap, complications arose after Indonesia capped foreign participation to 20%. Astro had planned to take up a 51% stake when the venture was signed in March 2005.

Worse case scenario, Astro will write- off its RM200mil investment, should it decide to exit Indonesia.

Analysts however view this positively as this would mean a RM20mil monthly cost savings, which Astro is pumping in to keep the operations going.

“Astro has mentioned that they aren't going to let it hang for the next 1 to 2 years anymore. It's either on or off,” he says.

Says Chong: “We think a resolution in Indonesia, be it, Astro getting a new joint venture partner or completely exiting the business would be a positive turning point for Astro. I don’t think the market will punish them.”

Nonetheless, based on Astro’s last guidance it is unlikely that Astro will exit Indonesia as yet. During the last conference call with Chong, he says, management maintained that although negotiations remain complex and challenging, an exit plan is not being considered.

Astro has been more fortunate in India, where last month it announced a partnership with Chennai-based Raj Television Network.

It also has a partnership with India's Sun TV.

In addition, Astro is paying out more than 50% of its net profits as dividends with a yield of more than 3%.

Dividends have been on the rise from 2 sen in financial year (FY) 2005 to 7 sen in FY07 and 10 sen in FY08.

“We are modelling FY 2009-FY11 dividends of 13-17 sen (payouts of more than 60%) supported by its strong free cash flows of RM300mil-RM600mil per annum and balance sheet of more than RM1bil cash,” says Chong.

For its year ended January 2008, revenue increased 16.97% to RM2.6bil, but the company was in the red with a loss of RM6.16mil from a net profit of RM160.43mil in the previous period.

If the speculation on the bid to acquire TVB materialises or turns into a reality, Astro will very likely have addressed the need to add shareholder value.

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