Asian Pay Television Trust - Maybank Kim Eng 2018-10-09: Still In Adjustment Period

ASIAN PAY TELEVISION TRUST (SGX:S7OU)

Asian Pay Television Trust - Still In Adjustment Period

Asian Pay TV Trust (APTT) wholly owns Taiwan Broadband Communications (TBC), which is a virtual cable-TV monopoly in five service areas in Taiwan.
TBC provides basic cable pay TV, premium digital and cable broadband services. Given its positioning, its basic pay TV rates are annually regulated in each area.
But unlike NetLink Trust’s (SGX:CJLU, Rating: BUY, Target Price: SGD0.93) returns which are determined by a set pre-tax WACC formula, there is no guaranteed regulatory return for APTT. A more conservative approach to gearing since the beginning of 2018 has led to lower though undisclosed DPU guidance for 2019E.

Covering 1.2m homes in its service areas, of which 760k are on its basic cable TV service, it sees ample opportunities for cross-selling its premium digital cable TV and cable broadband services.
Currently, only 25% and 27% of its basic cable subscribers have signed up for these two respective services. Full digitisation of set-top boxes was only achieved in 2017.

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Given similar pricing points, the launch of unlimited wireless data plans by mobile operators could create substitution risks for TBC’s fixed broadband services. Rising viewership of streaming services on wireless and fixed broadband may also subdue demand for traditional pay TV services.

A generous policy of 100% FCF payouts coupled with hefty capex of more than 20% of revenue per quarter since 3Q14 resulted in a Jun 2018 net debt to EBITDA ratio of 7x and interest cover of 3.4x.
Although 2018-19E capex guidance is lower y-o-y, the board has guided for more conservative gearing and thus, lower DPUs for 2019E.

Listed as a business trust on SGX on 29 May 2013 with Taiwan Broadband Communications (TBC), as its seed asset. Taiwan Broadband Communications currently serves South Taoyuan, Hsinchu County, North and South Miaoli and Taichung City. On 26 Jun 2013, it received approval from National Communications Commission of Taiwan to expand into Greater Taichung. Although broadband services began here in 4Q14, content negotiations delayed pay TV’s commercial launch. This remains unresolved.
Cable Law amendments approved in Dec 2015 called for the shutdown of analogue broadcasting by 2017/18 and switch to digital broadcasting. This led to higher capex in 2016-17.
Full deployment of digital TV set-top boxes achieved by end-2017; ahead of competitors.

Owns 100% of Taiwan Broadband Communications (TBC), the sole cable TV operator in five franchise areas in Taiwan. TBC covers over 1.2m homes, of which 760k subscribe to basic cable TV.
Cross-selling opportunities within group. Around 79% of 1H18 revenue was from basic cable while the remainder on premium digital pay TV and cable broadband.
Over 100 channels on basic cable TV with significant local content not available on other platforms.
Premium digital cable TV service provides up to 77 additional channels with a 25% penetration of basic subscriber base in 2Q18. All subscribers have been upgraded to digital set-top boxes.
Hybrid fibre coaxial cable broadband service capable of up to 500Mbps speeds. Around 27% penetration of basic subscriber base.
S.W.O.T analysis available in the PDF report attached.

FactSet only has two consensus estimates for up to 2019E. A -4% revenue CAGR has been forecast for 2017-19E vs Asian Pay Television Trust (APTT)’s 2% CAGR in 2014-2017. This is likely on the back of competition from wireless-broadband competitors. Profits are thus expected to fall by an 11% CAGR over 2017- 19E.
But with management flagging a lower DPU in 2019E, consensus estimates a steeper -27% DPU CAGR relative to profits over 2017-19E . 1H18 revenue and profit were 50% and 62% of full-year consensus estimates.
Asian Pay Television Trust (APTT) trades at 34x 2018E and 17x 2019E consensus earnings. As a business trust which with similar distribution mandate structure to REITs, P/Es may not be an appropriate valuation methodology. Rather, yields and DPU growth may be more relevant.
Despite expectations of a DPU decline, the trust is expected to generate yields of 19% and 10% for 2018E and 2019E. In comparison, telco service providers, other business trusts and overseas infrastructure funds are expected to yield 5-10%. Still, generally higher gearing may be behind recent investor caution, as implied by its share-price correction. Also, the actual level of its DPU cut in 2019E has yet to be disclosed, likely creating an overhang on whether the consensus estimate is adequate.

Online pirated content is a free substitute for pay TV, although TBC’s local content is a significant part of its value proposition to households.
Basic cable TV tariffs are regulated by the authorities in each service area. Minimum quality of service standards applies but there are no formulas to protect cable operators’ returns such as inflation-adjustment factors.
Potential substitution of fixed broadband services by 5G deployed by wireless operators. On the other hand, there could be opportunities to sell fibre backhaul to such operators.

Luis Hilado Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-10-09

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