Tuesday, December 17, 2013

APTT -- Is distribution sustainable?

APTT is a much disliked counter going by what forummers/ bloggers said about it during its IPO, but it has fallen 23% from its IPO price with a yield of above 10%. It is still a bargain now?

As with HPHT, the sustainability or the doubts of its sustainability of payout is the main reason for its under performance. Lets us look at APTT and the various threats and see if they are justifiable.

First, earning power.


If we go earlier, a similar picture emerges.


The good operating numbers correspond to the increasing basic TV RGUs and the increasing prenium TV customers.

Is such operating numbers sustainable? Competition within franchise area is currently non existence but with the rezoning of franchise areas, competition might increase, and "On 8 May 2013, the NCC approved preliminary permits for Vastar and TOP for franchise area extensions into Taichung City, which will allow them to begin the required construction according to the business plans they submitted to the NCC", Taichung CIty has the highest per capital income, and that properly explained why the competitors are keen to move in. That TV penetration rate of approximately 67.8% across its franchise areas might mean untapped market. However, given thatThe NCC only issues licenses to applicants that have built and deployed 100% of their network, and that TBC own expansion in its own Taichung City (Greater Taichung) is reported to take years,the threat while real, is not imminent. The fact that the penetration is not high would mean that its doesn't have to be a zero sum game. (Subscribers have to leave TBC). IMHO, competition is also mainly in the premium digital TV channels since there is no cap in the fees operators can charged customers and TBC has higher ARPU in the prenium digital market compared to CNS and Kbro, and the penetration rate for prenium digital TV is low. (Pie enough for everyone). I doubt the new competitors will want to compete in the price on the basic TV since the cap rate is already regulated by NCC.

As for competition by substitutes, such as IPTV. The biggest player CHT, has several disadvantages. 1st, is platform disadvantage. about 80% of the viewers in Taiwan use cable TV while broadband penetration is nowhere near, and since CHT has government stake, it cannot access certain local content such as news programme, such the competition is not a apple to apple type of competition.

The cap rate for basic TV can be lowered by the local government during poor economic times and it has been lowered by $10 in 2011 and $15 in 2013. But looking at the operational numbers,TBC is hardly affected by it, registering revenue growth in 2011. Cap rate can also be lowered as a "penality" for poor quality of service, or inability to meet digital penetration target of 50% in 2015. TBC respond to this by offering free digital boxes (capex risk, which will be explained later), and is expected to reach 50% in 2014. As for content, TBC do not make content but source for content from aggregator MCI, if there is a complaint from local government, I think they can always go for another content aggregator (There are 4 in Taiwan).

Hence basic TV cable are defensive, and make up of mostly local content, with the lack of killer content (think starhub and singtel for EPL), and that is one of the biggest generator of revenue, and a platform for bundling and cross selling.

So, barring a earthquake/typhoon knocking out infrastructure, I think we can establish the earning power is more or less "safe", given that the broader industry is also sound. (from prospectus: MPA forecasts indicate that total premium digital cable TV RGUs will grow at a CAGR of 15.2% between 2012 and 2017. Premium digital cable TV ARPUs averaged NT$188 per month as of 31 December 2012, having grown 5.6% year-on-year. MPA expects that by 2017, premium digital cable TV ARPUs are expected to reach NT$229 at a CAGR of 4.0%.)

Next, capex and finance costs 

Capex will affect distribution. To sustain distribution of 8.25 cents, they need to pay out 118 million from EBITDA of 200 million. So they have to keep to about 80 million of net costs (capex, financing costs, etc). They forecast capex of 49 million and 40 million for 2013 and 2014. This capex of 49 million include the completion of the upgrade of the HFC network to 870 MHZ and is inclusive of the free digital boxes given out.

Also, from the covenant of debt, they cannot exceed 120% of capex of a proposed year (excluding expansion into new franchise area), assume the projected year is 2013, so the ceiling (before including rollover of excess money in the preceeding year) is 60 million. The trust has incurred capex of 20 million thus far, but has not drawn down the revolving facility (only 10 million NT dollars) to fund capex.

Loans available for capex expansion = about 110 million

since out of 198 million of revolving facility, 50.2 million is earmarked for tax settlement, 56.5 million is earmarked for new zone expansion.

Assume they use 20 million from cash flow and another 20-40 million from loans to fund capex, we can assume it will take about 2.5 years to 5.5 years before they need new loans, and assume also 4% from revolving facility, there will be a further increase in Fiance cost of about 5 million

They have a all-in rate of 4% for their term loan. That works out to be 45.8 million a year, plus the additional 5 million interest for capex and 2 million interest for tax settlement, total foreseeable fiance cost for the next few years will be about 53 million.

Taken with 20 million capex, they willl be left with 7 million to pay taxes. But the forecast income tax to be paid is 20 and 16 million. So there is a shortfall of 9 to 13 million. so the more sustainable payout seem to be 7.5 cents instead, still above 10%

If interest cost increase by 1 %,  payout become 6.5 cents, yield is still respectable at 8.8%.

So, in conclusion, high dividend seem unsustainable and the fall of 8.5 cents to 6.5 cents is more than 20%, which is what is happening to HPHT now.

But wait, HPHT did not have the 1% increase in interest cost factored into yet, and APTT 2014 distribution seem possible if you work the sums between loans and cash flow for capex.

But, there is another 2 more caveats.

1) They expect tax settlement to be 46 million and has set aside loans of 50.2 million for it. Although they claim negotiation is going on well, but the actual claim is 122.4 million, a whopping 74 million shortfall.

So this is the biggest risk to distribution. If this tax issue don't work out well, kiss your distribution goodbye.

2) Macquarie has rather a bad records running MIIF.  Will they embarked on new zone expansion although it is highly capex intensive? Or will they do badly at the hedging?

So is the above 10% yield worth it???? Is your call.

1 comment:

  1. Just a update here, for anyone that read the comments. haha,

    APTT has not settled the tax issue with Taiwan authorities, which is a big disappointment. In Q4 report, they mentioned they expect a written settlement by Q1 2014, but now they have pushed back the date to 2014. The longer the wait, the worst things might happen.