Business

Saturday July 25, 2009

Separating the wheat from the chaff

By B.K. SIDHU  and LEONG HUNG YEE


Analysts upbeat on potential revamp of the Astro group in light of changing local broadcasting landscape.

IT took 10 years and US$2bil for Rupert Murdoch to get into China for the market potential there mesmerised him. But he lost a lot of money trying to sell pay-TV services in China, writes Bruce Dover in his book, Rupert’s Adventures In China.

The pay-TV business offers huge potential but the risks are equally high. The guzzler is content cost and unlike Murdoch, who has control of sports and the 20th Century Fox, T. Ananda Krishnan’s stable of broadcasting/celco is somewhat content-reliant even though he controls Celestial Pictures.

Astro’s giant satellite transmission discs. The broadcasting company has to address the challenges it would face when TM starts offering IPTV services.

Celstial owns and had digitally re-mastered the 760-title Shaw Brothers library for worldwide distribution.

Like Murdoch, Ananda also tried his best to make it big in China but his lieutenants often say China is a very difficult market. So it can be understood why Murdoch is still losing money there. Ananda’s Indonesian venture has also turned sour.

But India is a huge market with tremendous potential and Ananda was one of the few early birds that entered the market and despite the sourish Indonesia venture, Ananda’s Astro All Asia Network plc (Malaysia operations) is a cash cow.

Astro group’s revenue grew from strength to strength with a compound annual growth rate of 15% from financial year (FY) ended January 31, 2007 to FY09.

Its earnings before interest, tax depreciation and amortisation (Ebitda) in FY09 was higher at RM696mil versus RM615mil in FY08. Ebitda margin sustained at 24% in FY09.

Ananda is into broadcasting and cellular business in India and advertising in China.

In Saudi Arabia, Astro has a joint venture with Saudi Telecom Co Ltd and Saudi Research Marketing Group to aggregate and distribute digital content to the Middle East and is committed to invest RM56mil for a 29% stake in the venture. Saudi Telecom also has a stake in Astro sister company, Maxis Communications Bhd.

A Separation?

So when news leaked out last week that Astro may be separating its international business, it came as no surprise to some analysts.

But some questioned the move: “Why take the loss-making divisions out?’’

Astro has a 20% stake in Sun Direct TV, a direct-to-home player with 3.2 million subscribers and 170 channels. Via Maxis, Ananda controls a large portion of India’s Aircel, the sixth largest mobile player.

Despite intense competition, India has a huge appetite for pay-TV and mobile operations for its one billion population.

Astro Malaysia operations has been subsidising the Indian operations.

Astro chief financial officer Grant Ferguson said the share of losses from Sun TV in FY09 was RM60mil or 3 sen per share and it expected it to remain earnings dilutive till FY13 with share of losses up to RM529mil. Astro has invested RM69mil to date in India Radio and will invest a further RM110mil over the next two years.

The exact details are not available and Astro has decided not to elaborate beyond the fact that it is studying various proposals put forth by its bankers and will make the necessary announcements at an appropriate time.

It did not however, deny that a separation may be in the offing.

What has been speculated is that Astro is considering a plan to divest its unprofitable international operations in a deal valued about RM9bil.

A media report said Astro’s two main shareholders, the privately held Usaha Tegas and Khazanah Nasional, will buy Astro’s unprofitable international operations under the deal which may see Astro paying a one-off dividend of RM1 per share.

Another report suggested that Astro will sell its Indian operations.

During a press conference last week, Astro deputy chairman and group CEO Ralph Marshall said the plan ‘‘may include the separation of the international operations from the Malaysian operations and proposals are being considered to restructure the company, which will result in an efficient capital and corporate structure.’’

Interestingly, state-owned investment arm Khazanah Nasional Bhd has stakes in both Astro and TM. TM is embarking into the IPTV business while Astro, clearly, wants to be a dominant player in that segment.

With Khazanah’s influence, Astro can ride on the HSBB to offer cable TV while TM could offer IPTV, such as video on demand and so forth. This way, both could compete by offering different content.

“So TM should stick to what it knows best and focus on IPTV. There is no room for head-on competition but complementary offering is preferred,’’ says analyst.

Despite the scarcity of information, many analysts have started crunching the possibilities.

One expert said it ‘‘made a lot of sense to take out the domestic and international operations and have Maxis re-listed either directly or via Astro or just have a very strong strategic tie-up with Maxis in view of a quadruple play.’’

Quad play or sometimes humorously referred to as “The Fantastic Four,’’ is a marketing term that combines triple play service of broadband Internet access, television and telephone with wireless service provisions.

This is necessary as the world is borderless and people are looking for new ways of accessing and viewing content at the cheapest cost.

Astro’s direct-to-home offering via satellite transmission sometimes has a rain-fade (losing signal due to rain, snow or ice) issue that could be one of the factors people will switch if cable TV comes to Malaysia. Enter high speed broadband (HSBB), there may be competitors that will want to go into the cable TV business. Telekom Malaysia Bhd (TM) is building the HSBB and has said it will offer IPTV (internet protocol TV) services.

The move towards HDTV (high definition TV) by Astro is the way forward but it should not stop there. Astro has to address the challenges it would face when HSBB is available. Of course Astro has an upper hand with content but the strength of the other aspiring players in cable TV sphere should not be underestimated.

Astro TV chief executive officer Rohana Rozhan said the group invested some RM300mil to develop local content and localisation and for the financial year 2008, the company spent RM240mil.

She added that Astro’s new set-top boxes which are IPTV-enabled will be distributed from October onwards.

But with a very strong tie-up with Maxis, both Astro and Maxis, when combined into a huge organisation will have a lot to offer in the market place. What is needed is some beefing up of the Maxis network which seems to be congested in some areas.

Overseas operations

Maxis also has operations in India. Experts feel that both the Indian operations of Astro and Maxis should be merged and listed on the Indian stock market, with a dual listing on Bursa Malaysia.

This may seem far fetched to Ananda, but that’s what some analyst reckon as the way forward. For investors of Astro, they can still have access to the Indian operations after it is taken out of Astro.

“We believe that this deal (separation of international business), if true, is generally positive for the stocks as this exercise will effectively result in Astro being solely an operator with local operations,” JP Morgan said, pointing out that Astro had previously used RM300mil to RM400mil FCF (free cashflow) generated in Malaysia annually to offset some losses in its overseas venture.

“Hiving off its Indian business venture will effectively put Astro in a slight net-cash position,” it said.

CIMB Investment Bank added that “Astro would be able to focus solely on its core Malaysian operations and Astro would no longer have to book losses in India. In our forecasts, we have imputed diminishing losses from Sun Direct TV over the next three to four years. We project total losses of over RM250mil for FY10 to FY11,” CIMB said adding that the divestment of Sun Direct TV would add three to four sen or 11% to 38% to Astro’s FY10 to FY11 earnings per share.

The minorities

But what does this mean for minorities?

“If Astro is de-listed, they get the money but no longer the exposure to a dominant broadcaster. If the operations are separated – domestic is kept and international hived off to another unit – then there is little exposure to the Indian operations and whatever Astro Malaysia rakes in there. Astro is a potential dividend play stock,’’ says an analyst.

How long can Astro continue to borrow money for the Indian operations even though it is a great cash generator?

“No point increasing the borrowing to support an under-performing assets and at the same time cutting off your source of cheap funding from the public by taking Astro private. Let it remain listed but separate the overseas ventures,’’ says the analyst.

Ferguson says the overseas investments are expected to negatively impact the group’s earnings over the next three to four years before turning cash positive.

After having invested a total of RM1.03bil in key overseas investment from pre-FY08 until FY09, Ferguson says Astro is committed to invest RM321mil from FY10 to FY12 for its key overseas investments.

If there is a Maxis/Astro marriage, it would become a very solid much sought after broadcaster/telco, not only locally but also regionally.

JP Morgan currently values Astro’s Malaysian business at RM3.50 per share, while to date Astro has invested RM454mil or 23 sen per share for its 20% stake in Sun Direct TV.

“Hence, we believe Usaha Tegas and Khazanah will have to offer at least 23 sen or more in order for shareholders to agree to the sale.

“The 23 sen per share seems fair as one of Sun Direct’s competitors, Dish TV trades at enterprise value/ subscriber of RM647 while Astro’s 20% stake to subscriber amounts to about RM709,” it says.

CIMB says if there were a cash payout, it could take the form of a special dividend or a capital repayment.

Astro paid out a total of 10 sen per share or RM193mil in dividends in FY09. As of April 30, Astro’s cash stood at RM1.1bil while debt was about RM1.5bil, including the drag down for Sun Direct TV.

“A cash payout of 80 sen per share translates into RM1.6bil, exceeding the current cash level,” it adds.

Excluding any divestment of assets, Astro’s existing cash hoard can support an additional payout of up to 50 sen per share, after taking into account its normal dividends, CIMB says.

“We think that the potential restructuring is likely to realise some value to be returned to shareholders,” it adds.


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