Asian Pay Television Trust (APTT)

[tanjm]

I had a quick look at Starhub. It has been paying about 340 million in dividends a year. Its free cashflow for the last 2 years has been 461 and 291 million respectively (difference has been capex looks like). It is also fairly similarly indebted. It faces fierce competition in mobile, broadband and cable TV with SingTel in an almost saturated market.

So..... would anyone venture to explain why Starhub is a 5% yielder and APTT is a 10% yielder?

[Greenrookie]

I had a quick look at Starhub. It has been paying about 340 million in dividends a year. Its free cashflow for the last 2 years has been 461 and 291 million respectively (difference has been capex looks like). It is also fairly similarly indebted. It faces fierce competition with SingTel in an almost saturated market.

So..... would anyone venture to explain why Starhub is a 5% yielder and APTT is a 10% yielder? FX accounts for some of it of course, but this is a very wide gap.

Hi tanjm,

Agreed, granted competition is expected to increase for APTT due to rezoning, but the market is not saturated, it has only 67% penetration rate. I am not sure if market is over-accounting for this risk. I am not sure Starhub growth prospect is any more visible than APTT.

I think the gap can be due to the following:
1) Macquarie poor record, as in MIIF shares price, the US debt swap failure.
2) The complexity of a trust as compared to starhub as a plain company.
3) Prudential relentless sellling.

But then again, the yield gap is too big.

[Nick]

I had a quick look at Starhub. It has been paying about 340 million in dividends a year. Its free cashflow for the last 2 years has been 461 and 291 million respectively (difference has been capex looks like). It is also fairly similarly indebted. It faces fierce competition with SingTel in an almost saturated market.

So..... would anyone venture to explain why Starhub is a 5% yielder and APTT is a 10% yielder? FX accounts for some of it of course, but this is a very wide gap.

Starhub

Total Debt: 687.5 mil
EBITDA: 732.7 mil
Total Debt to EBITDA: 0.94x

APTT

Total Debt: 975 mil
EBITDA: 195 mil
Total Debt to EBITDA: 5.00x

Huge gulf in their gearing.

(Not Vested)

[Greenrookie]

Since we are at the topic of debt, from the convenants:

The TBC Group’s financial covenants under the New Debt Facilities consist of the following, tested on the TBC Group on a quarterly basis:
• Gross debt/EBITDA ratio not exceeding 5.75 times for the initial four quarters, gradually stepping down to 3.0 times after the sixth year;
• Interest coverage ratio of at least 2.50 times, gradually increasing to 3.00 times after the first 2.5 years; and
Debt service coverage ratio of at least 1.20 times, gradually decreasing to 1.05 times after the fourth year.

Which bring to the question, how are they going to bring the ratio down? The loans will be more or less the same, as stated in the prospectus, and CFO has replied amortization of loans will be minimum as they will be looking to refinance the loans come 2016-2017 ahead of 2020.

The way I see it, there are few ways to do it (or a combination)
1) Growth in EBITDA
2) Issue rights or do shares placement to pare down debts

Growth will come at 2015 earliest and given the debt ratio has to come down significantly by 2019, either the trust is confident of growth or they are going to shareholders for money soon.

[tanjm]

I had a quick look at Starhub. It has been paying about 340 million in dividends a year. Its free cashflow for the last 2 years has been 461 and 291 million respectively (difference has been capex looks like). It is also fairly similarly indebted. It faces fierce competition with SingTel in an almost saturated market.

So..... would anyone venture to explain why Starhub is a 5% yielder and APTT is a 10% yielder? FX accounts for some of it of course, but this is a very wide gap.

Starhub

Total Debt: 687.5 mil
EBITDA: 732.7 mil
Total Debt to EBITDA: 0.94x

APTT

Total Debt: 975 mil
EBITDA: 195 mil
Total Debt to EBITDA: 5.00x

Huge gulf in their gearing.

(Not Vested)

EBITDA is "Earnings before Interest, Tax, Depreciation and Amortization". So its a slippery concept esp the depreciation part. In theory, depreciation (absent of accounting tricks) should roughly mirror capex on average.

Depreciation for starhub was 270m while 25m for APTT.

On another measure, EBITDA over revenue, APTT is twice as efficient coming in at 65% versus 35% for Starhub.

One way to treat indebtedness is the "distance" of APTT from defaulting. EBITDA/interest costs is 8 times for APTT and a massive 36 times for starhub. APTT has no refinancing until 6 years from now, but if it did refinance at 200bp higher than now, its ratio would go down to 5 times - still ok. So while the ratio for starhub is much higher, if we are only concerned with defaulting, its not a linear comparison.

APTT's yield is very high. Even Asian non investment grade bonds currently yield on average about 7%.

I'm not saying it should yield like starhub, but that the yield gap is "ridiculous", esp considering that it is shielded from refinancing risk until several years from now and we can consider its EBITDA to be stable, if not slightly growing.

[greengiraffe]

basically one is a telco company while the other is a financially engineered business trust.

Vested in both
GG

I had a quick look at Starhub. It has been paying about 340 million in dividends a year. Its free cashflow for the last 2 years has been 461 and 291 million respectively (difference has been capex looks like). It is also fairly similarly indebted. It faces fierce competition in mobile, broadband and cable TV with SingTel in an almost saturated market.

So..... would anyone venture to explain why Starhub is a 5% yielder and APTT is a 10% yielder?

[tanjm]

Both are mature businesses with limited growth prospects and pay most of their free cash flow as dividends.

I am getting the feeling that the big gap is just due to refinancing risk which APTT will have in about 6 years. How to quantify this in a rough way?

What follows is just a very rough pencil and paper estimation... and ignores discounting for simplicity.

Assuming that cashflow is relatively constant for 6 years, this means that about 60% of the market price of APTT is covered by dividends in that time. Which can be taken that the market values the residual value at 40%.

There are 2 types of refinancing risk. The first is interest rates and the second is failure to refinance.

If interest costs were to double, APTT dividend yield will go down by about 20% (to say 8%). Which is still respectable and certainly worth more than 40 cents to the dollar. If you assume that APTT would be worth nothing in the event of failure to refinance, then the market, by implication, thinks there's a 60% chance of a failure to refinance - which is a hard to believe number.

[Greenrookie]

AM fraser has a report on APTT.

See attached.

Key point:
1) There is TALK (only) of refinancing its 2020 debts so that they can payout dividends quarterly. Unless the "new" debts allow significant interest savings with the same runway to maturity (e.g.2020), I do not like the smell of it.

Quarterly, semi-annually, what is the big deal? interest costs savings should be the primarily reason, when management gave such lame reasons, I also gave me the creeps that there is something more than meets the eye. Or maybe the analyst just jumping the gun.

i find the forecast growth of AM fraser too optimistic.

If you look at slide 3 of JP morgan research,
https://markets.jpmorgan.com/research/em...-1258015-0

400K households at greater Taichung include all three franchise area Dali, Shalu and FengYuan. All three at its own, 133k to 188k household, as compared to its hometurf of 400k households. And APTT/TBC is already enjoying the highest 70% penetration rate at hometurf and is saturated (Growth is flat for a few quarters already.)

APTT is going in to "snatch" business, not link up households, it will not be easy. Assuming APTT entry can increase penetration rate of the 3 counters of greater Taichung to be 70%, it will be 18k, 13k, 16k(very rough estimate), about 47k more households, and there is rather a optimistic projection.

I also do not think APTT is striking 3 counties at the same time.
If we take ARPU of APTT as a guide, 538 NT$ for cable TV,47K household will just yield 1.05 million S$ revenue.

It seems there is too much hype over its Taichung expansion... The growth should come from its "upgrade" to digital premium channels, or its broadband selling.

But both are moving terribly slowly even in its home turf.

Anything wrong with my line of thoughts? appreciate comments

Then again, spending capex of close to 60 million to greater Taichung for 1 million recurring revenue, managment cannot be so stupid right??? They are capable of gaining market shares at expense of competitors???

[Nick]

AM fraser has a report on APTT.

See attached.

Key point:
1) There is TALK (only) of refinancing its 2020 debts so that they can payout dividends quarterly. Unless the "new" debts allow significant interest savings with the same runway to maturity (e.g.2020), I do not like the smell of it.

Quarterly, semi-annually, what is the big deal? interest costs savings should be the primarily reason, when management gave such lame reasons, I also gave me the creeps that there is something more than meets the eye. Or maybe the analyst just jumping the gun.

IIRC, it is necessary to refinance the loans since they have to start amortizing the loan principal in a ballooning profile. This will reduce the distributable income.

[Greenrookie]

AM fraser has a report on APTT.

See attached.

Key point:
1) There is TALK (only) of refinancing its 2020 debts so that they can payout dividends quarterly. Unless the "new" debts allow significant interest savings with the same runway to maturity (e.g.2020), I do not like the smell of it.

Quarterly, semi-annually, what is the big deal? interest costs savings should be the primarily reason, when management gave such lame reasons, I also gave me the creeps that there is something more than meets the eye. Or maybe the analyst just jumping the gun.

IIRC, it is necessary to refinance the loans since they have to start amortizing the loan principal in a ballooning profile. This will reduce the distributable income.

Ar huh... puzzle solved... everything will fall in place nicely.

I was wondering why I they so confident about the convenant(Gross debt/EBITDA ratio not exceeding 5.75 times for the initial four quarters, gradually stepping down to 3.0 times after the sixth year of the debts, that they can reduce debts so drastically by 2019 or achieve resounding growth. Looking at my earlier posts, growth for Taichung should not be spectacular in any way, but maybe laying the bigger base for cross selling.

So the strategy is financial engineering...

But NIck, why couldn't they refinance part of the debt through new debts at lower costs, and achieve lower interest costs and "ammortization" at the same time??

I mean 2020 is 6 years away from now, if they use shorter tenure loans say 3-4 years, it is quite likely that they can get a lower interest rate and use the loan to payoff (ammortize) existing loans.

Anyway, its all speculation now, just thinking aloud.