I have initiated a small position on APTT after HPHT.
I think confidence on business trusts have been low, with almost none doing better than their IPOs, but the fact that I am picking up the trusts at 20%-30% below IPO price means something to me.
After learning from NICK about FCF, I decided to be even more conservative and calculate FCF as
FCF = OCF - capex - finance costs - income tax
As such, I think I can arrive at a rather conservative or if you like, worst case scenario valuation.
It looks bad, that would mean only 1.9 billion HKD per year, and a yield of 3.9%
But that is the so-called worst case scenario, can it get any worse, sure, but I think we have to be reasonable in our stress tests too. Not too much a turn off.
I tried to do a stress test for APTT too, I am comfortable that it is not going to the dogs but I am quite sure payout will fall further after the 2014 forecast of 8.5 cents dividends.
I assume they drawn down the remaining loan for tax settlement and capex, and fiance cost balloon to 48 mio per annual
I assume they do not do a acquisition of franchise zone, and set up shop all over again, and they can keep capex to 50 million (they forecast capex of 40 mio in 2013) , and 2012 capex was 47 mio.
Assume income tax is 30 mio
Assume OCF of 176 mio (av of 4 years OCF including forecast of 190 mio in 2013)
We have 176-30-50-48=48 mio
We have 3.3 cents dividends, at purchase price of 77 cents, we have yield of about 4.3%
Then lets assume Mr Market demands 7.5% yield at trusts.
In the worst case scenario, price of HPHT and APTT will be:
COINCIDENTALLY 44 cents for both.
Hmm... I am over-paying definitely in a worst case projection. However, I expand HPHT to improve operations numbers, and I believe APTT will be able to give 12 cents over the next 1.5 years, and operations will not fall off the cliff.
So, It is about trust... with trust and faith in my own judgement, I took the plunge, If it turns out to be a silly decision, well, it suits my nick. hahaha