| 2007 | 2008 | ||||||
| Price: | 2.45 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 60 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
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Trading below liquidation
value of $4.70 per share, yet growing cash flow around 60% with a monopoly
position and an incredible demographic trend behind its back, Asian Television
represents an excellent investment opportunity. Focused on the soaring numbers
of South Asians (non-Chinese, mainly Indians) in
Started in 1971 by a visionary entrepreneur
In 1971, Shan Chandrasekar
started a production company that sold ethnic programming to existing channels
in
In 2001 Asian Television finally
got broadcast on Rogers Communications, eastern
1) Asian Television Network is the company’s flagship 24 hour channel with the best programming from Zee TV & Star Plus, the two biggest stations in India, as well as original programming, cricket, soaps, etc.
2) Sony Entertainment shows Hindi family entertainment and US movies dubbed in Hindi
3) B4U shows the best of Bollywood movies. (Think HBO).
4) Alpha Punjabi shows Punjabi focused programming
5) Tamil shows Tamil based programming
6) ARY shows Pakistani programming
7)
CBN shows
8)
Zee Cinema is the #1 Bollywood channel in
9)
Zee Gujarati is the Gujarati (language from the Indian
state of
10) Aastha is a culture, social and spiritual focused channel
11) Bangla is a Bangladeshi channel
12) NDTV is New Dehli TV which is an English language based news channel
13) B4U Music is the first South Asian music channel
14) Cricket Plus is a 24 hour cricket channel
Asian Television currently has 160,000 to 180,000 subscribers, and its subscriber base now represents over 10% of Rogers Communications digital subscriber base.
Serving an exploding demographic
There are one million South
Asians in
In addition to higher than average birth rates, Canada’s open immigration policy has made it an accessible country for immigrants of all kinds, but especially educated immigrants who already speak English, for which Indians are at a great advantage.
Asian Television has been launching new channels at an impressive clip, launching 8 new channels since 2005, representing a 130% increase in the number of channels it offers. The company is essentially in a land grab for a demographic of people that has 17 languages or dialects. The company is building an impressive breadth of programming and distribution all surrounding its main channel which boasts an impressive “wide moat advantage.”
Main channel offers a monopoly “wide-moat” advantage
From Rogers Communications
website (note: Sahara One is a new
If you would like to order
As part of its category 1 channel license that ATN received in 1997, ATN acquired added stipulations which substantially restrict competition. Basically, if another channel is launched for South Asian programming, a subscriber must subscribe to ATN along with the new channel. The cost of this makes it almost cost prohibitive to the subscriber. And it might be the reason that Sahara One only has 3,500 subscribers. ATN is appreciative as these 3,500 subscribers are also subscribers of ATN.
I think that these restrictions
and ATN’s main license represents a competitive moat the size of the
Subscriber Count is exploding while churn is low
Last year the total subscriber count increased by 40%. A big portion of the subscriber count came from all of the new channels that the company launched in 2005. However its main channel, ATN, saw subscriber growth of 28%.
The company estimates that their churn is about 3% a year. If customers are paying $14.95/month for a channel and the churn is this low, this gives confidence as to the value of the channel to those consumers.
The company estimates that its
natural subscriber count growth just due to demographics is about 6%-7% a year.
However, the company hopes to launch 1-2 channels a year and also the company
does not yet have full distribution throughout
Distribution should dramatically increase as will new channels
While Rogers Communications
carries all 14 of Asian Television’s channels in Eastern Canada, Shaw
Communications, the dominant provider in
Other smaller cable providers including Telus and BellExpressVue carry 9 and 8 channels out of a possible 14. As distribution increases, Asian Television subscriber count should jump.
The other factor driving subscriber growth is the launch of new channels. Asian Television is already readying Ariana TV focused on Pakistanis and HUM TV focused on the Urdu language.
The combination of increased distribution with continued new channel launches should allow Asian Television to grow subscriber counts at least 15% to 20% per year on a conservative basis.
Advertising revenue mix should switch to higher rates with more
national ads
Beyond just growing subscriber numbers, advertising should continue to jump higher. In the first half of 2007 advertising revenue increased over 80% from the prior year. Advertising should continue to increase as the company transitions from having primarily mom and pop advertisers to more national advertisers who pay higher rates.
Right now 60%-65% of advertisers are mom and pop advertisers who on average pay about C$300 a minute for an ad. National advertisers pay around C$1000 a minute per ad. As they flip the percentages for advertisers to the majority advertising revenue will continue to surge higher.
Growth will drive cash flow growth through 2010 and beyond
I expect that subscriber revenue should increase at about 20% a year for the next three years conservatively. I also expect advertising revenue to grow about 40% a year for the next three years as the company transitions to more national ads. Remember that these are much lower than current growth rates of 42% in subscriber revenue in the first half of 2007 and an 80% increase in advertising revenue. I expect programming revenue should increase about 20% a year as well.
I estimate that expenses should rise about 20% a year and some leverage should start to drip down to the bottom line. I expect that the company will earn C$0.18 in EBITDA in 2007, C$0.25 in EBITDA in 2008, C$0.34 in EBITDA in 2009 and C$0.48 per share in EBITDA in 2010.
Return on Invested Capital is ridiculously high
Asian Television has had a return on capital of 150% in fiscal 2005, 105% in fiscal 2006 and 95% in the trailing twelve months ended June 30th, 2007. The calculation for Return on Invested Capital is:
ROIC = EBIT / (Net Working Capital + Net Fixed Assets)
For Asian Television I added net Other Assets to the denominator as it includes their Program Rights & Tape Library. I used the balance sheet basis for these figures. Any company generating close to triple digit ROIC rates are valued very high because those are the companies that generate so much value. In short, Asian Television is rapidly creating tons of value for shareholders.
International opportunity
Not included in the above
estimates is the very strong opportunity for the company to duplicate its
success in
There are simply lots of international expansion opportunities that could cause a sizable increase in revenue and cash flow numbers.
Valuable Film Library
Ten years ago, Asian Television
had its film library of shows, interviews, concerts, etc. appraised at C$26
million. Since then they have added literally thousands of hours a year of
content. This asset is of substantial value. The company is currently exploring
opportunities to resell some of this content back into
Sum of the parts Liquidation Value
The most interesting part of analyzing Asian Television is the sum of the parts valuation. Consider for example the value of its Category 1 license for South Asian programming for its main channel. In 1987, Fairchild Media Group paid $12 million for the Chinese license. Now if we index this for inflation (3%), the value of this license is $22 million. However, I would argue that this license is much more valuable as the demographic has become demonstrably more powerful and larger. If we were to say that the value of this license is worth a 10% annual increase since 1987, we would get a share price that is 20% higher than the current share price.
Being as conservative as possible, and assuming a $22 million of value for the main channel, $38 million for their film library, and $4 million a piece for each of its 13 other licenses, plus $2 million for its building in Newmarket and $1 million for its equipment, we get a value of $115 million. That comes out to around C$4.70 per share, significantly higher than its current share price.
Valuation
I expect Asian Television to trade to C$5 in the next 12 months either on a break-up valuation or based on 20 times my 2008 EBITDA estimate. And due to its growth and its monopolistic moat, it could trade significantly higher than that. In two years, the company could trade to C$10 per share if you were to take into account the excess value of its film library.
Another way to look at this company is to take out its film library value of C$40 million (current estimate), or C$1.63 per share, and you are paying 5-6 times EBITDA for a company currently growing cash flow at 60% and should grow cash flow over 25% a year for the next three to five years.
Risks
The first risk to mention is that the company is very illiquid and that you must be patient to trade it. In my opinion, this is a stock to own not to trade. The majority of shares are controlled by the CEO who owns about 16.4 million of the 24.4 million shares. That leaves 8 million shares in the float. That gives shareholders C$22 million of available float to buy at current prices.
The second risk I see is the Internet. The company is soon to announce an Internet strategy and is fully willing due to its low cost structure to take advantage of the Internet. However, there may come a time (I don’t think we are near to it), when piracy on the Internet similarly hurts TV like it is currently hurting music. I believe the current lack of bandwidth and equipment and the current power of cable and satellite TV makes it likely that this will not be an issue for 5 or 10 years at least.
The final risk I see is that the CEO owns the majority of the shares and while I believe him to be an honest person, hard working and respectful of shareholders, there is always the chance that he will do something that is detrimental to minority shareholders.
Summary
Asian Television represents the ultimate investment of a high margin business with excellent growth prospects with a very, very wide moat. I believe my forecasts and valuations in here have been extremely conservative because the stock price is so low there is no reason to show what really could be ridiculous numbers. Consider that the company could earn close to C$1 per share in EBITDA in five years, meaning it could be worth C$15 to C$20 per share.
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