Asian Pay Television Trust (APTT)

[Nick]

APTT ANNOUNCES FINANCIAL RESULTS FOR THE QUARTER AND YEAR-TO- DATE PERIOD ENDED 31 DECEMBER 2013

Key Highlights
• Performance in line with the forecasts outlined in the Prospectus
• Revenue for the quarter of S$78.7 million
• Asset EBITDA for the quarter of S$51.8 million
• Distribution of 4.13 cents per unit declared for the six months ended 31 December 2013
• Re-affirm distribution guidance of 8.25 cents per unit for the twelve months ending 31 December 2014

http://static.macquarie.com/dafiles/Inte...13.pdf?v=3 [Press Release]

http://static.macquarie.com/dafiles/Inte...13.pdf?v=3 [Slides]

http://static.macquarie.com/dafiles/Inte...13.pdf?v=3 [Report]

Details of the expansion was provided with estimated capex of $60-80 million spread over the next 2 years.

(Not Vested)

[Greenrookie]

A reproduce of my blog:

APTT

I believe APTT has 3 major risks.

1) The poor settlement of tax provisions with Taiwan Tax Bureau

2) Runaway Capex

3) Runaway interest rate.

4) Regulation risk, mainly through re-zoning or non-issue of licenses

With the latest Quarter Report, I decided to accumulate further, when the price hardly move with the announcement of dividends and results. (Which was a surprise)

They have mentioned they expect a resolution with terms similar to that set out in the prosepctus with the Tax authorities by the end of this quarter, with a written agreement. Although it is not confirmed, I would deem it a balant lie if events turn otherwise at this stage.

They have more details on capex for the next 2 years. They project capex to be 40-50 million for 2014 and 40-60 million for 2015. This is what I expected when I study the prospectus. With 60 million as capex, they need no further loans for at least 2.5 years. Hence, I say dividend projection is safe for 2014. For 2015, if capex remain high at 60 million, they might need to drawn down loans further or distribute a more sustainable 7.5 cents, which is almost a 10% yield for me, but I believe they would drawn down more loans and keep distributions level.

If you look at the convenants, capex can go above 60 million for expansion into greater Taichung. But, what happen now is the maximum of 60 million is for both digital box upgrades and cable expansion into Greater Taichung. So the risk of runaway capex is low if they stick to what they set out to do.

For number 3, their debts and swap agreement are all now in Taiwan Dollars denomination, so the US dollars loss suffered the other time will not replay. When they used up most of the debt facilities in 2015 or 2016, and they decide to refinance their loans, a 1% increase in finance cost (assuming all loans drawn down), payout will be 6.5 cents, still an attractive 8.8% for 2015-2016, if you ask me.

For 4, the biggest risk is competition from re-zoning. It will affect pricing power and might lose subscribers. It is now the highest risk as compared to the lowest risk a quarter ago. If APTT expansion is a guide for a timeline, with them expecting to get a provisional license by the end of the year, we can expect competition to start this year in APTT home turf.

From the last quarter, operating numbers remain strong for the biggest basic cable TV, since competition is not yet in play. We should watch how their competitors can capture this market over the next few quarters.

As for non-renewal, most licences which are valid for 9 years before they are up for renewal, and the earliest any of their operators need to renew their license will be 2016. Given that the digital penetration rate in their franchise areas are ahead of schedule by that mandated by NCC (Taiwan Regulator), and recent “forced sale” of units of PRC owners by APTT, means they shouldn’t step on NCC toes.

Until now, I need to highlight to readers that there is an article on nextinsight that holds a vastly different view from mine. He thinks APTT is for gamblers. Readers have to decide on their own:

http://www.nextinsight.net/index.php/sto...mba-energy

[AlphaQuant]

When they used up most of the debt facilities in 2015 or 2016, and they decide to refinance their loans, a 1% increase in finance cost (assuming all loans drawn down), payout will be 6.5 cents, still an attractive 8.8% for 2015-2016, if you ask me.

If current SGS 10y is 2.5%, and CBO estimates a 2% Fed funds rate in 2016, this implies a 4.5% 10y SGS in 2016 (assuming parallel moves between local 10y and US short rates)

Suppose the market still demands a 10% yield for this counter in 2016, then the implied price is 0.065/0.1= 65c i.e. a drop of 15c in price which is just abt the same as the dividends collected, so just abt scratch over 2 years.

However this will imply a shinkage of the risk premium that the market expects i.e. currently the 10% yield implies a premium of 10-2.5=7.5% over the 10y riskfree rate; and in 2016, the same 10% means a risk premium of just 10-4.5=5.5%. Sounds rather unlikely.

I haven't looked thru the APTT numbers and above back-of-envelope calculations are based on your post.

On first thought, i will think that to make money over the next 2 years (i.e. capital gains/losses + dividends collected>0), then

1) either the income has to grow faster than your estimated growth rate (not sure what you assumed the income growth rate is)

2) debt has to reduce to overcome the rate rise (not likely since you mention they are likely to draw down more for capex)

3) market rerates APTT to lower the discount rate (i.e. the market willing to pay up for the units to bring the price up so there's lesser capital losses). Not saying it is impossible but prob needs a catalyst.

[Greenrookie]

When they used up most of the debt facilities in 2015 or 2016, and they decide to refinance their loans, a 1% increase in finance cost (assuming all loans drawn down), payout will be 6.5 cents, still an attractive 8.8% for 2015-2016, if you ask me.

If current SGS 10y is 2.5%, and CBO estimates a 2% Fed funds rate in 2016, this implies a 4.5% 10y SGS in 2016 (assuming parallel moves between local 10y and US short rates)

Suppose the market still demands a 10% yield for this counter in 2016, then the implied price is 0.065/0.1= 65c i.e. a drop of 15c in price which is just abt the same as the dividends collected, so just abt scratch over 2 years.

However this will imply a shinkage of the risk premium that the market expects i.e. currently the 10% yield implies a premium of 10-2.5=7.5% over the 10y riskfree rate; and in 2016, the same 10% means a risk premium of just 10-4.5=5.5%. Sounds rather unlikely.

I haven't looked thru the APTT numbers and above back-of-envelope calculations are based on your post.

On first thought, i will think that to make money over the next 2 years (i.e. capital gains/losses + dividends collected>0), then

1) either the income has to grow faster than your estimated growth rate (not sure what you assumed the income growth rate is)

2) debt has to reduce to overcome the rate rise (not likely since you mention they are likely to draw down more for capex)

3) market rerates APTT to lower the discount rate (i.e. the market willing to pay up for the units to bring the price up so there's lesser capital losses). Not saying it is impossible but prob needs a catalyst.

Thank you alphaquant for you thoughts on this matter.

I assume 0% growth from now to 2015. I am conservative, I believe there can be some organic growth through cross selling of products but at the rate the premium subscribers are increasing due to their cross selling effort and the almost zero possibility of raising price In Taichung city due to possible competition, I would put growth at zero, but I do not see negative growth, since penetration rate at basic cable level is below 70%. Any surprise on the upside will be a bonus.

From 2016 onwards, if they gain access to greater Taichung successfully, they will have access to 400,000 homes ( their total subscribers for basic is like 755k), I believe if executed properly, without cut throat competition, they should be able to grow 2-3 % over the next 2-3 years assuming they get 10-15% penetratation rate then.

I agree that if market demand 10%, then net net gain is zero, I however, feel that market is demanding too much risk premium Now till to the past record. Given the lifespan of TV assets, and its strong operating numbers, I do not see why APPT should be trading at a discount of 1-4% compare to other reits or trusts, (2-3% for most reits and trusts, only a few like sabana or viva is having a yield close to 9%) At least I have my base covered. I feel market is accounting for tax settlement risk, rezoning risk and refinancing risk unfairly, since 1) is getting out of picture, 2) is manageable ( it is still a significant barrier to entry ). 2) and 3) are most valid. Hence I believe if APTT delivers, market should not demand 10% yield but a lower yield.

Management did mention amortization of loans will take place very slightly in 2014 and 2015/2016 where they will then try to refinance their loans. They are also contemplating bonds etc.

[Nick]

Personally, I can understand why APTT is trading at 10% yield:

1) The dividend yield is not sustainable since it exceeds FCF. The Management can't keep financing capex with new debt.

2) The Management is unable to repay debt with such a high payout ratio. This introduces significant refinancing risks.

3) Regulatory risk - tax issues, potential reduction in ARPU etc.

4) Competition with new rezoning laws could potentially reduce income in the future.

5) New Management - unproven. Or some might point to MIIF meagre returns since IPO.

However, there are room for incremental growth from expansion if executed properly. Of course, I could very well be just too cautious. If these risks above turns out to be just my feeble imagination and none of it came true, then I will look back at the 10-11% yield with envy haha. We will see how this business trust pans out in the coming years.

(Not Vested)

[jim_city]

Operating Cash Flow - 79.7 million
CAPEX - 42.67 million
FCF - 37.03 million

Total Distribution to be paid - 59.34 million

Hmm.. I wonder where the additional 12 million came from. Doesn't seem to tie with their distribution policy though.

(vested)

APPT Distribution Policy:
Distributions will be declared and paid in Singapore dollars. Any proposed distributions by the Trust will be paid from its residual cash flows (distributable free cash flows), which consist of cash flows from dividends and principal and interest payments (net of applicable taxes and expenses) received by the Trust from the entities held within the Group, and any other cash received by the Trust from the entities held within the Group, after such cash flows and cash have been applied to pay the operating expenses of the Trust, including the Trustee-Manager’s fees, repay principal amounts (including any premium or fee) under any debt or financing arrangement of the Trust, pay interest or any other financing expense on any debt or financing arrangement of the Trust, provide for the cash flow needs of the Trust or to ensure that the Trust has sufficient funds and/or financing resources to meet the short-term liquidity needs of the Trust and provide for the cash needs of the Trust for capital expenditure purposes.
The Trust intends to distribute 100% of its distributable free cash flows.

[mm63]

I believe you meant additional $22mil? (59-37=22) Could it be from the IPO proceeds?

Operating Cash Flow - 79.7 million
CAPEX - 42.67 million
FCF - 37.03 million

Total Distribution to be paid - 59.34 million

Hmm.. I wonder where the additional 12 million came from. Doesn't seem to tie with their distribution policy though.

(vested)

APPT Distribution Policy:
Distributions will be declared and paid in Singapore dollars. Any proposed distributions by the Trust will be paid from its residual cash flows (distributable free cash flows), which consist of cash flows from dividends and principal and interest payments (net of applicable taxes and expenses) received by the Trust from the entities held within the Group, and any other cash received by the Trust from the entities held within the Group, after such cash flows and cash have been applied to pay the operating expenses of the Trust, including the Trustee-Manager’s fees, repay principal amounts (including any premium or fee) under any debt or financing arrangement of the Trust, pay interest or any other financing expense on any debt or financing arrangement of the Trust, provide for the cash flow needs of the Trust or to ensure that the Trust has sufficient funds and/or financing resources to meet the short-term liquidity needs of the Trust and provide for the cash needs of the Trust for capital expenditure purposes.
The Trust intends to distribute 100% of its distributable free cash flows.

[Greenrookie]

Prudential has ceased to be a substantial shareholder, which is regularly paring down its stake, whereas Temasek Holdings through its subsidiary has become a substantial shareholder, almost doubling its stake from 3.71% to 7.59%

I wonder who is the "greater fool"?

(vested)

[Greenrookie]

Operating Cash Flow - 79.7 million
CAPEX - 42.67 million
FCF - 37.03 million

Total Distribution to be paid - 59.34 million

Hmm.. I wonder where the additional 12 million came from. Doesn't seem to tie with their distribution policy though.

(vested)

APPT Distribution Policy:
Distributions will be declared and paid in Singapore dollars. Any proposed distributions by the Trust will be paid from its residual cash flows (distributable free cash flows), which consist of cash flows from dividends and principal and interest payments (net of applicable taxes and expenses) received by the Trust from the entities held within the Group, and any other cash received by the Trust from the entities held within the Group, after such cash flows and cash have been applied to pay the operating expenses of the Trust, including the Trustee-Manager’s fees, repay principal amounts (including any premium or fee) under any debt or financing arrangement of the Trust, pay interest or any other financing expense on any debt or financing arrangement of the Trust, provide for the cash flow needs of the Trust or to ensure that the Trust has sufficient funds and/or financing resources to meet the short-term liquidity needs of the Trust and provide for the cash needs of the Trust for capital expenditure purposes.
The Trust intends to distribute 100% of its distributable free cash flows.

79 million OCF for 216 days, APTT is constitute on 30 April, but TBC numbers is captured for 216 days only. See footnote.

SO 79 million is 2/3 of a year. Q4 OCF is 42 million. Annualised the 79 million you will get about 120 mio OCF. FCF should be 78 million instead.

Of course Capex is expected to increase.

but the shortfall of 40 mio is not too alarming, in my opinon (assume 60 mio capex), it could be lower than that

[Sarkwan]

Operating Cash Flow - 79.7 million
CAPEX - 42.67 million
FCF - 37.03 million

Total Distribution to be paid - 59.34 million

Hmm.. I wonder where the additional 12 million came from. Doesn't seem to tie with their distribution policy though.

(vested)

APPT Distribution Policy:
Distributions will be declared and paid in Singapore dollars. Any proposed distributions by the Trust will be paid from its residual cash flows (distributable free cash flows), which consist of cash flows from dividends and principal and interest payments (net of applicable taxes and expenses) received by the Trust from the entities held within the Group, and any other cash received by the Trust from the entities held within the Group, after such cash flows and cash have been applied to pay the operating expenses of the Trust, including the Trustee-Manager’s fees, repay principal amounts (including any premium or fee) under any debt or financing arrangement of the Trust, pay interest or any other financing expense on any debt or financing arrangement of the Trust, provide for the cash flow needs of the Trust or to ensure that the Trust has sufficient funds and/or financing resources to meet the short-term liquidity needs of the Trust and provide for the cash needs of the Trust for capital expenditure purposes.
The Trust intends to distribute 100% of its distributable free cash flows.

79 million OCF for 216 days, APTT is constitute on 30 April, but TBC numbers is captured for 216 days only. See footnote.

SO 79 million is 2/3 of a year. Q4 OCF is 42 million. Annualised the 79 million you will get about 120 mio OCF. FCF should be 78 million instead.

Of course Capex is expected to increase.

but the shortfall of 40 mio is not too alarming, in my opinon (assume 60 mio capex), it could be lower than that

GreenRookie, when you wrote that the "CAPEX is expected to increase", I believe you do not mean that the CAPEX will also rise proportionately to the full number of days in the year? Any planning for CAPEX for the next period is predetermined for the full period, so CAPEX for next period cannot be projected based on past spending in a partial year.