Astro - Cost of misadventure

Astro mis-adventure in Indonesia cost shareholders tons of money. Over the last two years, market capitalization shed about 67% from high of $ 5.70/share. They lost about RM 7 bln market value and lost about RM 1.1 bln on mis-adventure in PT Direct Vision Indonesia. If you are a shareholder, you have a plenty of reasons to grief but what if you are not? Should you be rejoicing because the market punishes the stock to ridiculously low?

Outstanding shares: 1936 mln
Mkt capitalization : 3581 mln

Top 3 reasons people hates Astro

1. Legal battles on termination of Indonesia joint venture. Their previous partner PT AM sues Astro for unlawful service termination and ask for compensation. Astro took more offensive move by filling arbitration in Singapore to recover a sum of RM 880 mln for the services they provided since 2005. Once you get into legal mess, you are creating uncertainty and market hates uncertainty.

2. Indian JV loses of RM 60 - 80 mln for the next two years before break even. They have about 20% stakes in SunDirect TV. Most fear this will be another failure like PT Direct Vision (Indonesian JV).

3. Malaysian consumers are cutting spending - APRU erosion, higher churns, etc.

On its Indonesian venture, I believe that was a gross mistake. They should not have pursued with the venture when the law limiting foreign equity to maximum of 20%. Glad that they finally pulled the plug on the venture.

Astro began its entry into the Indonesian market in March 2005 via a joint-venture agreement with Indonesia’s Lippo group. Under the agreement, Astro and Lippo group would operate a pay-TV business via the latter’s wholly owned unit, PT Direct Vision (PTDV). The original agreement was for a 51:49 shareholding interest between Astro and Lippo group in PTDV respectively. But this was derailed five months down the road when a new ruling by the Indonesian government for all broadcasters came into effect to limit foreign equity participation to 20%, compared to the initial 51%. Subsequent negotiations between Astro and Lippo group to restructure the venture were held but both parties could never reach a solution up to this day.

Nevertheless, the full launch of the satellite pay-TV business went ahead in early 2006 under a trademark licensing agreement between Astro and PTDV that allowed the latter to use the “Astro Nusantara” brand in Indonesia. On top of that, Astro would be supplying broadcasting services and technical support to PTDV.

(Click here to read from the Star)

Well, forget the past, more important questions - do they have a future? Regulation risk is an important point to remember in this business, especially on overseas ventures. Their 20% stakes in SunDirect should not pose a major problem. Other JV in Brunei, China and Saudi are pretty minimal. I believe they will concentrate more on domestic operations going forward.



The business is hinges on one one important factor - can they continue to increase their domestic penetration?




I think as of Oct 2008, their penetration stands at 44%. They have a target to achieve 60% penetration by 2012. 2.6 million households subscribe to Astro out of total of 5.8 million TV households. Plenty of rooms for growth in a boring business like this. In 5 - 7 years from now, I believe Astro will have revenue close to RM 4 - 5 bln. Basing on cost of capital of around 12%, Astro worths around $ 3.20/share. I have seen analysts trying to discount the cash flow with much higher cost of capital - one of the very ridiculous that I came across was CIMB at almost 16%. Well, they are trying to justify for a lower value so they can either increase cost of capital to imply much higher risks. Not only CIMB guilty of this, OSK did the same thing too, they use 12% in January and recently increase it to 13% and discount another 20% on SOP to justify Astro only worth RM 2.20/share. I can actually also play with all kind of variables on a spreadsheet to jack up or jack down the value. Not trying to put down on analysts but just to show you a point how bearish they are.

Assuming their dividend payout same like FY 2008, DY is 5.4% {$ 0.10/RM 1.85}. They just need to cough out RM 193 mln for dividend which is very easy. They can easily spit out at least RM 400 - 500 mln Free-Cash-Flow per year for next 2-3 years. It's very easy to support 5.4% DY.

I believe Astro brand name remains unimpaired. I know the management has done some very dumb things but it is a solvable problem.