We are initiating coverage on Asian Pay Television Trust (APTT) with a Buy rating mainly due: 1) attractive dividend yield of about 10.5% coupled with 0.86x price to book; 2)Utility-like, subscription-based business model with substantially all payments made in advance and 3) growing subscriber base and stabilizing Broadband ARPU through various up-sell and cross-sell initiatives. We are ascribing a fair value of S$0.915, premised on FY2014 target yield of 9.0%.
Listed on the SGX-ST on 29 May 2013, APTT is the first business trust in Asia focusing on pay-TV businesses. The group’s investment mandate is to acquire controlling interests and to own, operate and maintain mature, cash generative pay-TV and broadband businesses in Taiwan, Hong Kong, Japan and Singapore. It intends to distribute 100% of its distributable free cash flows to unitholders. Seed Asset
APTT’s portfolio comprises of its seed asset i.e. Taiwan Broadband Communications Group (TBC), which is Taiwan’s third largest cable TV operator. TBC is the sole licensed provider of cable TV services in five franchise areas in Taiwan (namely South Taoyuan, Hsinchu, North & South Miaoli and Taichung City) and provides Basic cable TV, Premium digital cable TV and Broadband services to households and businesses in these areas. More importantly, it has ownership of HFC network and fibre backbone that allows TBC to operate independently of third-party networks.
TBC is a leading integrated cable operator in Taiwan that offers content advantage and high entry barriers due to high capital expenditure.
Similar to telcos, it generates relatively stable and defensive cash flows, thus providing unitholders with a decent cash yield return.
Able to enjoy operating leverage from a growing subscriber base and superior cost efficiency to support margin improvement.
Digital cable TV penetration in Taiwan is still lower than that of Korea, Singapore and Hong Kong
Strong regulatory push by government and National Communications Commission (NCC) to achieve the proposed 50% digitisation target by 2015
Consumer preference for better quality video and interactive services, which result in growing number of HD television sets in Taiwan
The group has received approval from Taiwan’s NCC to expand its Hybrid Fibre Coaxial (HFC) cable network from Taichung city to the greater Taichung area. Currently, it is the sole provider of cable TV services in Taichung City with an existing fully digitized network that passes approximately 400,000 homes.
As such, it is in a good position to pursue the expansion giving it the opportunity to deliver its services to an additional 400,000 homes. We understand that the network expansion will be funded from its existing borrowing facilities.
Management expects to achieve the forecast digital set-top box penetration of 40% by the end of 2013 and over 50% by the end of 2014. Meanwhile, the Taichung area network expansion is on track and likely to make a positive impact on distributions in the medium term. We also understand that decent progress has been made with respect to the outstanding tax dispute and discussions are still ongoing with the Taiwanese tax authorities.
Going forward, its main focus will be on driving cash flow generation through operating the business and generating growth in cash flows through upgrading of the network and cross-selling of services across the subscriber base to drive non-subscriber revenue. In particular, we expect its Channel leasing segment to continue doing well, mainly due to robust growth in the home shopping industry.
Potential entrance of new players following NCC’s decision to grant conditional approval for rezoning applications from two other cable providers to expand their operations to the greater Taichung area
Basic cable TV rate cap is highly regulated by local governments while broadband pricing is under pressure given the intense competition. At the same time, the proliferation of internet may also cannibalize demand for cable TV services
Unlike REITs whereby they are required to pay at least 90% of net income as dividends, Business trusts such as APTT are not bound by such rule.
Valuation & Recommendation
Management has reiterated the distribution guidance of 8.25 cents per unit for FY2014, which effectively translate to an annualised yield of about 10.5% While market appetite for yield stocks may have reduced following US Fed’s recent QE tapering, we believe further downside should be supported by its relatively undemanding valuation of 0.86x P/B.
At the current level of S$0.785 (versus its IPO price of S$0.97), the share price may have already factored in potentially higher competition risk from 2015 onwards
Management expects continuous asset EBITDA margin expansion due to scalable and lean cost structure
To hedge against rising borrowing costs, the group has entered into interest rate swaps, which fix a significant portion of its loan exposure, resulting in a total interest rate cost of approximately 4% per annum
APTT is well-on-track to perform in line with the forecasts contained in the Prospectus as it expects to achieve digital set-top box penetration of 40% by the end of 2013 and over 50% by the end of 2014.
Publish date: 13/01/14