ASTRO - BUY - 19 Aug 2008

Astro All Asia Networks - Privatise to realize value? (Company Update)



Price: RM3.24

Target Price: RM4.30

Recommendation: BUY



· Potential privatisation? Rumours on the privatisation of Astro renewed recently amid reasons of undervalued share price and earnings volatility attributed to overseas business operations. Though privatisation may not be favourable under the current market conditions, the Group's healthy cash flow and its long suppressed share price performance undervaluing the Group's true potential value may render privatisation as a viable option to realise value.

· Potential upside. Astro's Malaysian operation which is expected to have robust growth is worth an estimated RM4.30/share based on the DCF valuation with 13% WACC. We estimate Astro's share price could worth up to an estimated RM4.51/share if overseas operations were factored in. The share which is trading below its IPO price (RM3.80) remains undervalued compared to its DCF valuation but is trading at 4.4x P/NTA.

· If the privatisation takes place. At the best-case scenario valuation of RM4.51 factors in both the domestic and overseas businesses. Even at the price of RM4.30/share which based solely on the Malaysian operation will give us: (1) a 32.7% potential upside from the current market price or (2) a 24.6% upside when adding in the investment incurred so far at its Indonesian and Indian ventures of RM0.21/share to the current share price.

· Loss making foreign ventures. While Sun Direct TV (India) has begun to show an encouraging subscriber base growth and management is expecting narrower investment loss moving forward, the Indonesian operation remains as Astro's major setback. Astro will continue to fund PT Direct Vision at the rate of RM20m/month until September 2008 when the agreement will expire. Although a huge amount of about RM530m has been invested in Indonesia, we maintain our view that exiting Indonesia will enhance Astro's earnings visibility and performance.

· Maintain BUY, Target Price at RM4.30 which is based on DCF valuation with 13% WACC for the Malaysian operation. The privatisation of Astro could potentially act as a re-rating catalyst. Nevertheless, we also expect share price to re-rate when concerns are reduced over time due to the strong local operation and more clarity from the Indonesia operations leading to better earnings visibility.