Just an update on my thoughts on APTT:
I believe APTT has 3 major risks.
1) The poor settlement of tax provisions with Taiwan Tax Bureau
2) Runaway Capex
3) Runaway interest rate.
4) Regulation risk, mainly through re-zoning or non-issue of licenses
With the latest Quarter Report, I decided to accumulate further, when the price hardly move with the announcement of dividends and results. (Which was a surprise)
They have mentioned they expect a resolution with terms similar to that set out in the prosepctus with the Tax authorities by the end of this quarter, with a written agreement. Although it is not confirmed, I would deem it a balant lie if events turn otherwise at this stage.
They have more details on capex for the next 2 years. They project capex to be 40-50 million for 2014 and 20-30 million for 2015. This is what I expected when I study the prospectus. With 60 million as capex, they need no further loans for at least 2.5 years. Hence, I say dividend projection is safe for 2014. For 2015, if capex remain high at 60 million, they might need to drawn down loans further or distribute a more sustainable 7.5 cents, which is almost a 10% yield for me, but I believe they would drawn down more loans and keep distributions level.
If you look at the convenants, capex can go above 60 million for expansion into greater Taichung. But, what happen now is the maximum of 60 million is for both digital box upgrades and cable expansion into Greater Taichung. So the risk of runaway capex is low if they stick to what they set out to do.
For number 3, their debts and swap agreement are all now in Taiwan Dollars denomination, so the US dollars loss suffered the other time will not replay. When they used up most of the debt facilities in 2015 or 2016, and they decide to refinance their loans, a 1% increase in finance cost (assuming all loans drawn down), payout will be 6.5 cents, still an attractive 8.8% for 2015-2016, if you ask me.
For 4, the biggest risk is competition from re-zoning. It will affect pricing power and might lose subscribers. It is now the highest risk as compared to the lowest risk a quarter ago. If APTT expansion is a guide for a timeline, with them expecting to get a provisional license by the end of the year, we can expect competition to start this year in APTT home turf.
From the last quarter, operating numbers remain strong for the biggest basic cable TV, since competition is not yet in play. We should watch how their competitors can capture this market over the next few quarters.
As for non-renewal, most licences which are valid for 9 years before they are up for renewal, and the earliest any of their operators need to renew their license will be 2016. Given that the digital penetration rate in their franchise areas are ahead of schedule by that mandated by NCC (Taiwan Regulator), and recent “forced sale” of units of PRC owners by APTT, means they shouldn’t step on NCC toes.
Until now, I need to highlight to readers that there is an article on nextinsight that holds a vastly different view from mine. He thinks APTT is for gamblers. Readers have to decide on their own:
www.nextinsight.net/index.php/story-arch...ust-and-ramba-energy
There is also a response from NICK and aplhaquant from valuebuddies (
www.valuebuddies.com/thread-3256-post-75919.html#pid75919
)
They make very valid agruments, personally, I will still like to see how this pans out.
Right now, I am assuming 0% growth till 2015, and refinancing takes place in 2015/6.
But they only need to refinance their loans in 2020.
Capex is reasonable, 2015 capex could be much lower, so might need to refinance loans much later.
That distribution is higher than FCF in 2014 due to higher cpaex is a valid concern, but if we look at FCF at a sustainable basis, the shortfall is not actually that scary, it is just 20-40 million, assuming capex is 60 million. They already reaffirmed DPU for 2014 anyway. Beyond 2014, even we take FCF of 80 million, assuming no growth, DPU is still around 6 cents. Of course, there is issue of capital loss as market continue to demand 10%. But how realistic is that?
As for interest risk, if growth do happen in 2015, if might just net off each other.
Another update in terms of shareholding:
Prudential has ceased to be a substantial shareholder for APTT, which is regularly paring down its stake, whereas Temasek Holdings through its subsidiary has become a substantial shareholder, almost doubling its stake from 3.71% to 7.59%
I wonder who is the “greater fool”?
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