Asian Pay Television Trust -
Taiwan licence re-zoning has so far been feared as a competitive threat. However, our analysis shows that a Taichung expansion will be hugely positive for TBC's cash flow. Expansion will turn APTT into a high-yield growth play, which should catalyse current low valuations.
We think APTT is likely to expand into greater Taichung and this will lead to higher dividends from FY16 on. Maintain Outperform with a higher target price, still based on DCF with COE of 11.0% (10.2% previously) and LTG of 1.0%. We keep FY13-14 distributions unchanged and lower FY15's by 4%. However, from FY16 onwards, distributions are raised 3-26%. The prospect of growth should lead to a re-rating, in our view.
Following the grant of a rezoned construction permit in Jun 2013, we believe a Taichung expansion will be highly value-accretive to APTT. We calculate an NPV of S$340m and IRR of 26%. We, therefore, expect management to proceed with expansion and an announcement of this should catalyse a re-rating from current low valuations. We estimate total capex of S$89m over five years and positive net cash flow from FY17 on, based on eventual market share of just 32% in the expanded geographic area. Once the build-out is complete, we estimate that cash distributions could increase by as much as 25% a year or S$35m.
Competitive risk controlled
We continue to believe that the other two licensees in Taichung are not credible competitors given the network infrastructure capex required for expansion. Anecdotally, we hear that there is no evidence of construction being underway in Taichung City. Finally, we believe that network construction into TBC's urban franchise area of Taichung City is less viable in terms of cost and speed compared with expansion into sub-urban areas outside the city.
While APTT's units have traded lower than the IPO price, it has performed in line with other interest rate-sensitive stocks, such as the SGX REIT index. However, the spread over benchmark rates remains much wider. We think the prospect of growth and a possible listing of a larger competitor will catalyse a re-rating of the units.
Publish date: 06/11/13