The $400 million to $500 million IPO of Malaysian satellite broadcaster Astro marks a turning point for the region's equity markets in 2003, as the primary market switches focus back to the traditional Asian growth stock after months of dividend yield plays. Under the lead management of CIMB, DBS, Goldman Sachs and UBS, pre-marketing of the deal began last Monday, with formal roadshows scheduled for the week of September 22 and pricing towards the end of the second week of October.
Astro is a company, which is only expected to become profitable for the first time by its January year-end in 2004. As such, a successful flotation will depend on investors' willingness to believe its growth forecasts. In its favour, the company is majority-owned by the Usaha Tegas Entertainment Systems, the private investment arm of local tycoon and Mahathir associate Ananda Krishnan.
The group has cultivated a long-standing and trustworthy track record with investors, most recently exemplified by the flotation of Maxis Communications in June last year. Despite the fact that many thought the stock overvalued, it has since performed and climbed from an institutional issue price of M$4.85 in mid-June 2002 to M6.50 as of last Thursday, up 20.37% so far this year.
In addition, observers believe Astro will benefit from a lack of alternative investments options in the Malaysian equity markets. As one puts it, "Most funds are underweight Malaysia and for those starting to re-consider growth stocks, there's not really that much choice."
Bankers are pitching British Sky Broadcasting (BSkyB) as its nearest comparable. Both BSkyB and Astro have a stranglehold over their respective markets. Cable TV has never really made many inroads in the UK and digital operators such as ITV Digital have gone bankrupt.
Likewise, cable TV has not proved popular in Malaysia, where Astro has been adding about 250,000 subscribers per year and its 23% penetration rate is said to be about five years behind the UK. A key investment decision for investors will, therefore, be whether Astro can replicate the kind of growth rates BSkyB was able to achieve at a time of less competing technologies.
In terms of valuation, both companies would look extremely expensive on an EV/EBITDA or p/e basis. Observers say BSkyB is still typically valued on a DCF basis, although some investors are starting to make a switch.
It currently trades around 25 times forward earnings, whereas Astro is being pitched around 16 times at the top end of its indicative range.
Syndicate members have assigned an average enterprise valuation in excess of $2 billion and an equity valuation of $1.6 billion to $1.9 billion (before the issuance of new shares, but after the redemption of a convertible preference share deal). Key assumptions behind this valuation include an EBIT forecast of roughly $45 million by this January year-end and $120 million the following January.
As one specialist puts it, "Costs are essentially fixed and so revenue from new subscribers goes straight to the bottom line. And revenues are growing by about 30% a year."
By next year, the company is also expected to start generating free cash flow of about M$120 million - a figure some analysts believe will quintuple within four years. There will be no dividend.
At the same time, Astro will be using IPO proceeds to significantly reduce its debt levels. Pre-IPO, gross debt stood at M$2.2 billion ($578 million). The redemption of the convertible held by Khazanah will reduce it by about $150 million to $200 million.
The company will then use up to $200 million of the prospective IPO proceeds to pay down additional debt, leaving roughly $200 million to $250 million outstanding.
It is selling about 25% of its equity in an all new share offering. This is complicated slightly by the existence of the convertible, held by government investment arm Khazanah Holdings. Pre-IPO, Khazanah owned 16% of the company's outstanding equity and post IPO and post conversion, its stake will rise to 22%. On top of this, a separate placement to Bumiputra trusts will top the two up to just above 30%.
The offering has an institutional/retail split, which will see roughly 65% sold internationally and 35% sold domestically, of which 15% will be sold to domestic institutions. Alongside the leads, co-leads are ABN AMRO, Cazenove and ECM Libra.
Astro currently has about 1.1 million subscribers and believes there are easily another one million subscribers to target in urban areas alone before it has to switch its marketing efforts to the suburbs. About 95% of profits come from pay-TV and radio.
Observers say Astro's radio business accounts for about 65% of the domestic radio advertising market, which in turn accounts for only 4% of the country's overall advertising revenue, implying plenty of upside. It also has a pay TV business in Brunei, a radio business in India and recently acquired Celestial, a company, which owns the Shaw movie library.
Astro itself is the brand name of Measat Broadcast Network Systems Sdn (MBNS). It has 40 TV channels, 16 radio channels and leases its satellites from a sister company.