Austar Retains Corporate And Defensive Appeal

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This story features AURUMIN LIMITED.
For more info SHARE ANALYSIS: AUN

By Chris Shaw

With advertising expected to slow in line with a cooling in the Australian economy times are getting tougher for media plays. For Pay TV group Austar United Communications ((AUN)), however, there are as yet no real signs of any slowdown, as the company reported quarterly earnings broadly in line with analysts expectations.

March quarter EBITDA (earnings before interest, tax, depreciation and amortisation) was $51 million, ABN Amro suggesting the result was driven by strong subscriber growth and good cost control. While this was the positive side the broker notes depreciation and amortisation charges were higher than expected, the result being a cut of around 26% to its net profit forecast for FY08.

Despite this the broker sees the company as offering relatively defensive earnings within the media sector, and with shareholders still to receive around $300 million in capital returns the broker has made no change to its Buy rating. Neither have JP Morgan and Deutsche Bank, the latter taking the view while the fall in subscriber numbers was expected given the tougher economic environment the outlook for continued growth in Pay-TV and the group’s monopoly position in the bush leave it well placed in the market.

Merrill Lynch sees less upside and retains its Neutral rating, the broker suggesting the $300 million in capital management proposals remain under a cloud given they require an improvement in debt market conditions and without them the upside in the stock is more limited.

On the flipside the broker suggests downside is also limited as the stock remains a potential target for corporate activity and is perceived in the market to be relatively defensive. It is also trading near the broker’s slightly reduced valuation of $1.32.

Citi takes the view there is some downside risk as the broker remains concerned about the group’s level of gearing and the potential for this to impact on earnings. It has not changed its estimates after the result, pointing out while EBITDA and ARPU (average revenue per user) were better than it had expected the customer churn rate was also higher than it had anticipated.

The broker acknowledges there is scope for some upside to its EBITDA numbers but with gearing high and ongoing need for capital expenditure there is some downside risk to its valuation, which currently stands at $1.33.

Overall the FNArena database shows little change to price targets post the result, not surprising given brokers have not made any major adjustments to earnings estimates. The average price target now stands at $1.64, down from $1.66 pre-the result and broadly in line with the median price target according to Thomson One Analytics of $1.68.

The database shows the company is rated as Buy five times compared to two Holds and one Sell, with the market showing little reaction to the result given the stock today is down 1c at $1.33, which compares to a trading range over the past 12 months of $1.17 to $1.80.

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