From income to growth
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 expect APTT‟s expansion into greater Taichung this will lead to higher dividends from FY16 on. Maintain ADD with a higher target price, still based on DCF with COE of 11.0% (10.2% previously) and LTG of 1.0%. We think FY13-14 distributions will be unaffected by expansion and expect growth from FY16-18, resulting in 40% higher distributions. 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 the start of commercial services 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 40% a year or S$52m.
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 only recently underperformed 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: 29/11/13