Asian Pay Television Trust – More insight from 1H14 Results Presentation at Suntec City

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.

Company Brief
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
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.
Q&A Sessions
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
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.
Rolf’s View
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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