By Chris Shaw
Pay-TV group Austar (AUN) yesterday reported interim revenue of $352 million and interim earnings before interest, tax, depreciation and amortisation (EBITDA) of $120 million, both results coming in slightly below market expectations.
The main features of the result, comment analysts at JP Morgan, were a low churn rate, which is a positive, offset by continued softness in residential subscriber growth. As the broker notes, Austar's residential subscriber base has been largely flat at around 615,000 subscribers since the September quarter of 2009.
In JP Morgan's view, this reflects an increase in competitive factors such as free-to-air networks offering multi-channel alternatives as well as growth in the personal video recorder market. Both of these are impacting on Pay-TVs relative value proposition according to the broker.
This is likely to impact on the average revenue per user (ARPU) metric going forward in JP Morgan's view, as the material slowdown in subscriber growth is likely to limit Austar's ability to introduce price increases. Such price increases are a key driver of ARPU growth.
BA Merrill Lynch makes a similar point, noting ARPU needs to continue to expand to maintain earnings growth. BAML expects this will occur, as while options such as Box Office movies and Main Event recorded lower ARPU in the period, the core subscription, MyStar and additional set top box fees rose 4.7% in the period in year-on-year terms.
Given a slowing subscriber environment, GSJB Were sees the next 12 months as a tough period for Austar, as new customers will continue to sample new free-to-air offerings and so have less incentive to sign up for Pay-TV services.
This will also impact on group costs, as GSJB Were notes management intends to commit more resources to customer acquisition. This is also likely to pressure margins if ARPU doesn't continue to increase.
To reflect the result brokers have adjusted earnings estimates for coming periods, GSJB Were cutting its earnings per share (EPS) forecasts by 17.6% this year, by 19% in 2011 and by 22% in 2012 to 3.9c, 5.0c and 6.5c respectively.
Credit Suisse has cut its 2010 forecast by almost 15% and its 2011 estimate by almost 11% to 4.4c and 6c respectively, while in 2012 it is forecasting EPS of 8.1c. UBS has not changed its estimates and is forecasting 5c, 6c and 7c through 2012, while consensus EPS estimates according to the FNArena database stand at 4.4c in 2010 and 5.5c in 2011.
On a more positive note for shareholders, Austar has indicated it remains committed to capital management, with either a buyback or a capital return of $400 million planned. The bad news is given higher debt costs than the company wants to pay, any such initiative has been put on hold until at least the first half of 2011.
Given a tough operating environment for Austar value becomes an issue and here BA-ML suggests the company is not particularly cheap. On the broker's numbers Austar is trading on a premium EV/EBITDA multiple of around eight times compared to global peers at around 6.6 times.
Given this BAML continues to rate the stock as a Hold, while it has cut its price target to $1.05. JP Morgan has reacted in a similar fashion, retaining its Neutral rating but cutting its price target for Austar to $1.09 from $1.38.
At the other end of the scale both Credit Suisse and UBS retain they Buy ratings on Austar with matching valuation-based price targets of $1.60. Overall, the FNArena database shows Austar is rated as Buy and Hold five times each, with an average price target of $1.31. This is down from $1.37 prior to the interim result.
Shares in Austar today are weaker and as at 1.05pm the stock was down 3c at $0.955. This compares to a range over the past year of $0.84 to $1.465 and implies upside of close to more than 37% to the average price target in the FNArena database.
