No High Speed Broadband Joy for Austar

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This story features AURUMIN LIMITED, and other companies.
For more info SHARE ANALYSIS: AUN

By Chris Shaw

Analysts at Morgan Stanley have joined a long queue of securities analysts in Australia who believe there is a lot to like about Austar United Communications ((AUN)) . The company is regarded a well run pay TV carrier with an effective monopoly in regional areas of Australia, which should allow it to deliver revenue and earnings growth as measured by EBITDA (earnings before interest, tax, depreciation and amortisation) in the low teens or high single digits each year in coming years.

This will be achieved by moves such as the recent introduction of digital Personal Video Recorders, which has attracted new customers, while Austar has also been able to increase the average revenue per user (ARPU) via the introduction of new products and offerings such as high definition channels.

But there are also some longer-term issues stopping the broker from becoming more positive on the company, these stemming from the potential for a high-speed broadband network in Australia to increase competition in the delivery of programs (entertainment content), which is the company’s main business.

As the broker notes, as more and more potential customers move to high-speed broadband services there is likely to be increased competition among those delivering content, especially as it is likely to see increased opportunity for customers to buy specific programs for a fee rather than need to subscribe to a complete service.

This suggests some uncertainty with respect to the long-term outlook for the company, the broker going as far as to suggest only about half of its base case valuation for the company can be considered relatively certain. This base case valuation is $0.97 per share and assumes steady growth as the Australian economy recovers gradually. In terms of actual numbers, Morgan Stanley implies subscriber growth of 6% this year and 5% in 2010, while ARPU increases 5% and 3% respectively and churn rates are steady.

Taking a bull case view of a strong economic recovery, translating to subscriber rates increasing by 8% this year and 10% next year, ARPU increases of 5% and 6% and a fall in churn to 15% all combined generate a valuation of $1.51. Morgan Stanley’s bear case model where subscriber growth slows to 3% and 2%, ARPU slows to 3% and 1% and churn increases to 17% results in a valuation of $0.79. Using a mid-point of its base and bull case models, the broker has set its price target on the stock at $1.24.

On its base case model the broker is forecasting earnings per share (EPS) of 4c this year, 5c in FY10 and 6c in FY11, while the FNArena database shows consensus EPS estimates of 3.8c and 5.3c for FY09 and FY10. Based on its forecasts the broker sees share price outperformance as unlikely given a subscription-based business is not highly exposed to a cyclical recovery in the economy, so it initiates coverage with an Equal-weight rating, which equates to a Hold recommendation. (Industry view is In-Line).

Where the broker sees potential positive news is in the scope for capital returns, estimating the company could decide to pay out to shareholders as much as $500 million over the next four years and still remain within its targets for gearing levels. This is particularly the case as while the company has some debt coming due in 2011 and 2012, it is not a significant amount, with management indicating cash balances and future cash flows will generate enough liquidity to meet any obligations until at least 2012.

Assuming payouts of $500 million equates to around 40c per share in nominal terms, or 31c on a discounted present value basis and given the magnitude of such payouts, the broker suggests major shareholder Liberty Global, which holds 54%, is unlikely to be a seller. This means there is not likely to be any significant overhang of shares on the market that could impact negatively on investor sentiment.

(Special note: this observation might prove important as some market speculation had surfaced recently that News Corp ((NWS)) might be a potential consolidator of Pay-TV in Australia, and thus interested in acquiring Austar).

Morgan Stanley’s neutral view on the stock is at odds with the market consensus as the FNArena database shows a total of seven Buy ratings and three Holds, with an average price target of $1.22. Shares in Austar today are slightly higher despite a weak overall market and as at 11.40am the stock was up 2c at $1.27, which compares to a range over the past year of $0.60 to $1.37.

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