Asian Pay Television Trust (S7OU) “APTT” is the only company in my portfolio that send invitation to unitholders to attend half yearly results presentation. I attended the two hour presentation, few hours ago at Suntec Convention presided by CEO Robert Thorpe and CFO Brian McKinley. I am impressed and it is a very fruitful trip. In this post, you will learn more about APTT, but I personally disclaimed any information that may not be accurately presented either due to my memory on the wane, or my weaken hearing and eyesight during the presentation.
APTT is the first business trust in Asia focused on pay-TV businesses of cable, digital TV and broadband. Seed-asset is Taiwan Broadband Communications and is the third largest cable television operator in Taiwan. Trustee manager is Macquarie APTT Management Pte Ltd sponsored by Macquarie Capital Group. APTT raised S$1.39b mid last year in at an IPO price of 97c. Temasek is currently the biggest shareholder with 7.6% shareholding. As of today, APTT is priced at S$0.845 with a market cap of S$1.2b. It is valued at approximately 10x (ttm) its earnings with a price to book ratio of 0.97.
The Results Presentation
The presentation started with 1H14 results announcements, which are largely within expectation of the prospectus forecast for 12 months ending 2014. DPU of 4.12c is declared for the half-year, with a re-affirm guidance of 4.13c to be paid in two batches ending September and December this year. That is a total of 8.25c representing 10% dividend yield – one of the best paying trust/reit around. The company reported half-yearly revenue of S$79.2m with an asset EBITDA of S$52.0m. Cash position is healthy at S$95m in excess of distribution. Total Debt / EBITDA is 5x (gearing of 40%) which management indicated that industrial standard is between 6.5x to 7.5x.
Going forward, there is neither desire to increase debt, nor to increase any costs associated with headcount expansion. Top and bottom line is expected to be flattish for the next two years with stable DPU. Growth is expected to be from 2016 onwards as the company expects to see revenue coming from the network expansion into Greater Taichung regions. The twin engines of growth will originate from Premium digital cable TV and Broadband segments. The company target to grow its subscribers by at least 150k over the next five years from its current base of 756k. This is a potentially 20% more than current earnings.
The company will continue to focus on organic growth, although slow, but stable - “just like utilities business”. Management said that acquisitions will not be discounted, although quite unlikely because smaller operators in Taiwan are normally family owned and it is very difficult to find one that is reasonably priced.
Apart for the CEO and CFO presentations, what captivated me most, is the Q&A session. The company catered sufficient time for the Q&A session and participation was very dynamic. Below you can find few interesting Q&As I unearthed.
Q: The Average Revenue Per User (ARPU) for Cable TV is ~S$20 with 150 channels in Taiwan. Why are subscription fees so low? Is it good? What will be the competition? Note: Starhub Pay TV ARPU is S$52 with limited channels.
A: Management answered that a low ARPU is actually “very defensive” when the economy is down. At S$20 bucks with 150 TV channels, most people who are out of jobs will probably stay at home to watch TV whole day and will not cancel their subscription. The cable TV market aside from APTT, comprised of Taiwan biggest operator - Chunghwa Telecom which is state-owned and has an 80% market penetration, as well as other smaller operators regionally. Government had given near monopolistic position to Cable/TV Operators operating in different regions, while dictating the pricing and the TV contents. APTT management had assured that as long as the operator continues to provide good service and rich contents of TV to the subscribers (“which they did and will continue to do so”), the company is very certain that regulator is unlikely make any changes undesirable to its business. Historically, such regulatory changes had never happened before. What is more assuring is that APTT operations started twenty years ago, offers good service at competitive rates, and has five licenses regionally with 756k of cable TV subscribers today.
Q: APTT is priced at less than its book value. Have management ever consider changing it from a Trust to a share Company? Look at Starhub or M1 which had price to book ratio of 10 times. APTT can immediately enjoy capital appreciation!
A: Management replied that the structure/accounting of the business trust is different compared to a normal company. Trust can pay more DPU compared to company and provide better yield to investors. In contrast there is no guarantee that the company will be valued at 8 or 10x book ratio by the market. But anyway, the management promised that they will take suggestions seriously and think about it. Management said that just like the last meeting, some unitholders had proposed dividends to be paid quarterly, others proposed to have more meeting with Q&A etc, in both situations, management had responded by having this 1H14 meeting and accepted that the DPU paid in two batches in the next half of the year.
Q: Will there be a situation similar to Singtel and Starhub competing against each other for the BPL?
A: Management explained that Taiwan Cable TV model is very different compare to Singapore or internationally such as USA. Most of the TV contents in Taiwan are localized “Mandarin” with very small percentage of international contents out of the 150 channels they offered. APTT already operated in Taiwan since 1994 in Taichung region owning the cable network and has a market share of 75% in that region. The monopoly characteristics of the business model are likely to be sustainable, because the barriers of entry are very high. For instance, because Taichung is a city, competitor first has to build underground cable and normally at night only. It is very difficult and very costly to build a cable network underground from scratch. Then it has to convince the TV content suppliers to sell them the contents. TV contents suppliers had been doing business with APTT for the last twenty years. It is unlikely that TV content suppliers will want to jeopardize their relationship with their biggest client in the region. Assuming both barriers are overcome by the new competitor, they still have to convince the subscribers to change to a new network operator, after comfortably using APTT network for twenty years.
In today’s presentation, I am impressed by the management transparency in handling questions and sensitive to unitholders’ opinions. At least they listen. I am definitely comfortable and reassured of the company’s future outlook! For the next two years, I am more than happy to see no surprises in earnings, and continue receive my >10% dividend, hoping for more growth in 2016 onwards. Of course there will be risks of competitors ruining the monopolistic business structure, or even more typhoons in Taiwan affecting the business adversely, although APTT is pretty used to the natural disasters over the years and had been coping well so far, as told by the management.
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