Saturday, January 11, 2014

APTT - 2nd practice of new model

For APTT, I have already establish its economic moat and earning power in an previous blog

http://sillyinvestor.wordpress.com/2013/12/17/aptt-is-distribution-sustainable/

APTT is a media company with regulation constraints/protection, with the rezoning of frachase areas, APTT will start to face competition from 2015 onward, but as mentioned in the previous blog, competition if any, will not be highly corrosive, as the pie (penetration rate low enough) is big enough, and competition will most probably be restricted to 2 per zone, since any more competition will most likely be suicidal due to the highly capital intensiveness of the business.

Growth in  APTT, can come in several areas:

1) Cross selling of  products (upgrade to prenium TV, bundle with broadband)

2) Organic expansion in the TaiChung Franchase area

The regulator wanted digitization, and depend/ required the TV operators to meet such targets, of which APTT has responded by giving new setup boxes. With the digitization, the premium TV market which is largely untapped, might be ready for  plucking.

However, given the rezoning challenge, I will still give a conservative 2% growth despite the good track records, as evident in the low churn rate, increasing RGUs etc.

As for FCF, instead of using FCF= OCF- PPE, I use FCF = OCF - PPE - Interest costs(with hedging at 4%) - taxes, since I am more interested in distribution than FCF alone, as it is a trust, not a company. So there is some discounting in place already. The FCF i used is 105 million.

Given the risk of competition is lower as compared to those of other sector (highly regulated); and that FCF is already discounted, I assign discount rate of 10% and 11%.

Share per value is 98 cents and 87 cents respectively.

Apply MOS of 20%, you get

78 cents and 69 cents.

Great, it seems I finally got something that I didn't overpay for.

Barring

1) natural disaster knocking out infrastructure

2) Poor settlement of tax settlement issue

3) fast and furious increase in interest rate especially in 2016 onwards (Time where they will start looking to refinance)

4) Aggressive price war from competitors for turf

5) Regulation changes affecting pricing(need legislative approval, and hence will not happen soon ) or renewal of license

APTT does seem OK as an investment, if you take into the consideration the 10.7% dividend you will collect every year if the 1)-4) do not happen.

 

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