MEASAT Global – Anyone for satellite business?

By: Surf88
Date: Monday, December 08, 2003
Time: 8:22:05 AM
 
 The sole licensed commercial satellite owner and operator in Malaysia with MEASAT-1 and
MEASAT-2 satellites
 High utilization signals relatively flattish revenue until the launch of MEASAT-3 in 2005
 Discounted cash flow valuation of RM4.65 per share translates to premium valuation of
46x 2004 PER, which is way higher than regional peers
 High-risk business not suitable for conservative investors

Relisting finally. MEASAT Global (MEASAT) (susp @ RM3.84, stock code 3875) (previously known as
Malaysian Tobacco Company) will be relisting this morning after suspension for about 1-1/2 years. This
follows the completion of a share placement exercise that reduced the stake of the substantial
shareholder, MEASAT Global Network Systems Sdn Bhd (MGNS) from above 90% to 74.9%. MGNS,
ultimately owned by Ananda Krishnan, has further trimmed its stake in MEASAT to just under 60% after
selling 15.4% to Telekom (RM8.55, stock code 4863) at RM4.165 per share.
 
Anyone for satellite business? MEASAT is the sole licensed commercial satellite owner and operator
in Malaysia, not an ordinary business indeed. It leases its transponders to customers that require satellite
services such as those in broadcasting, telecommunications and multimedia. A typical contract will be for
a period of three to five years, with lease charges denominated in US$ and paid three months in advance.
In the event of termination, the penalty will be the higher of 25% of remaining contract, or up to six
months’ rental.
 
The regulations and the risks. MEASAT operates in a globally regulated industry, where the number of
orbital slots and frequency rights are limited and governed by an international body. Locally, MEASAT is
regulated by two renewable licences (current expiry in Feb 2013). Heavy regulations aside, the satellite
industry is capital and technology intensive, and also subject to high risks, where the launch of a satellite
itself already faces many dimensions of uncertainties.
 
High utilisation rate… MEASAT owns and operates the MEASAT-1 and MEASAT-2 satellites which
were launched in 1996. They have in total 27 transponders, comprising 16 C-band (for data, voice and
video) and 11 Ku-band (Direct-to-Home or DTH television broadcasting and high-speed internet). As it
stands currently, their combined utilisation rate of 80% is high compared to between 52% and 76% for
regional peers.
 
…and strong regional reach. MEASAT currently focuses on South East Asia, where its customers are
usually the leading domestic and regional telecommunications and broadcasting operators.
Geographically, 40% of its customers are from Malaysia, anchored by sister companies, Maxis (RM7.35,
stock code 5051) and Astro (RM4.44, stock code 5076) which account for 40% of revenue. The balance
60% is spread over 12 countries. Segmental wise, 56% of MEASAT’s customers are from broadcasting,
37% from telecommunications and 7% from internet businesses.
 
 
MEASAT - Financial Track Record
 
Year End 31 Dec 1997 1998 1999 2000 2001 2002 Jan-Sep 03
               
Turnover (RMM) 128.2 147.4 155.9 184.3^ 122.6 137.8 94.3
              
EBITDA (RMM) 88.5 112.5 125.7 154.2 95.1 97.2 66.4
Depreciation (RMM) (55.4) (55.5) (55.5) (56.0) (56.8) (53.7) (42.5)
Interest Expense (RMM) (116.2)* (48.8) (70.9) (67.6) (24.4) (20.0) (26.2)
Pretax Profit (RMM) (79.8) 19.5 1.0 32.9 16.1 23.5 (2.4)#
              
EBITDA Margin (%) 69.0 76.4 80.7 83.7 77.5 70.5 70.4
Pretax Margin (%) nm 13.3 0.7 17.9 13.1 17.1 nm
 
EBITDA – Earnings before interest, tax, deprecation and amortisation
* 1997 - Includes forex loss of RM78M due to Ringgit depreciation
^ 2000 - Turnover includes RM66M in early termination fee
# 2003 - Includes RM10.5M one-time write-off of financing cost from debt refinancing exercise
 
 
Flattish revenue… As shown in the above Table, MEASAT already achieved positive EBITDA in 1997,
which was encouraging considering that this was the first full year of operation for MEASAT-1 and
MEASAT-2. If not for forex losses, it would have posted only marginal pretax losses. By 1999,
MEASAT’s transponders have reached almost full utilisation. However, following the early termination of
a lease contract in 2000 and competitive lease rentals since, turnover has remained relatively flattish from
2001. In fact, the non-renewal of two leases in 2003 has led to lower revenue in the first nine months of
2003 (on annualised basis).
 
A large proportion of MEASAT’s costs are fixed, where the biggest component is depreciation charges at
about 58% of total costs, followed by insurance at 16%. Generally lower interest expenses have helped
since 2001.
 
Awaiting impetus from MEASAT-3. Over the shorter term, MEASAT’s revenue upside seems rather
constrained as its two existing satellites are already operating at high utilization. For the next lift, we
would have to await the launch of MEASAT-3 in the second-half of 2005. Costing US$220M (RM836M),
MEASAT-3 is more powerful than MEASAT-1 and MEASAT-2, offering combined 48 C-band and Ku-band
transponders and wider coverage of about 70% of world population, and will be able to more than offset
capacity losses from the existing satellites when their useful lives end in 2008. MEASAT hopes to target
new customers and new countries with MEASAT-3, while also encouraging existing customers to upgrade
to the new satellite. As we understand, the response to MEASAT-3 has been promising so far. Other
growth plans includes joint venture in selected markets, starting with launch of MEASAT-5 in India and
MEASAT-6 in South Africa in 2006. As only two out of its 16 allocated orbital slots have been utilised, we
see good long-term potential in MEASAT.
 
Premium valuation. Valuation wise, we feel that the discounted cash flow method is more appropriate
for MEASAT given the finite life of satellites. This leads us to a valuation of RM4.65 per share, bearing in
mind the higher risk profile of its satellite business. At RM4.65, we would be looking at 2004 PER of 46x
and EV/EBITDA (EV = debt-adjusted market capitalisation) of 20x, which are way above regional peers
that trade from as low as 10x PER to as high as only 11x EV/EBITDA. It would hence not totally surprise
if MEASAT were to debut below our discounted cash flow valuation.
 
MEASAT had relatively low net debt of about RM160M at end-Sep 2003 (11% shareholders’ funds), but
this is set to rise with the launch of MEASAT-3. In view of its heavy capital requirement, MEASAT is not
likely to pay dividends in the near future.
 
Not for the average investors. As with its sister companies, investors can count on MEASAT’s
substantial shareholder to deliver returns over the longer term. However, we believe MEASAT is less
suitable for conservative investors given its higher risk profile and dividend constraints, while noting that
the next jump in revenue/profit is not expected until 2006.

Relisting Date 8 Dec 2003 KLSE Listing Main Board

Paid-up Capital 389.9M shares @ 78 sen par Market Cap @ RM4.65 RM1,813.2M
Major Shareholder MEASAT Global Network Systems, 59.6%; Telekom M'sia 15.4%
 
Year End 31 Dec 1999 2000 2001 2002 2003F 2004F
Turnover (RMM) 155.9 184.3 122.6 137.8 127.0 137.2
Pretax Profit (RMM) 1.0 32.9 16.1 23.5 12.9 39.4
Net Profit (RMM) 1.0 32.9 16.1 23.5 12.9 39.4
EPS (sen) 0.3 8.4 4.1 6.0 3.3 10.1
PER (x) @ RM4.65 n.m. 55.0 112.9 77.2 140.6 46.0
 
 
Category
 
Sector: Technology
Company: MEASAT