• As highlighted as a possibility by us earlier, Temasek Holdings has finally emerged as a substantial shareholder in Asian Pay TV Trust (APTT) after having bought 54.612mln shares at 80 cents (via married deals), raising their stake to 108,959,812 shares or 7.58% of the company. (The transaction was done on 28 Feb’14.)
  
• The above is positive for APTT as since its listing in mid-2013, both Prudential and Morgan Stanley have been paring down their holdings in the company and these open market share sales have negatively impacted APTT’s share price, with the stock having declined consistently since its listing to hit an all time low of 71.5 cent in Dec’13 against its IPO price of 97 cents.
  
• Prudential had ceased to be a substantial shareholder on 27 Feb’14 when it sold 5,150,000 shares at 80 cents each, reducing their stake to 67,327,000 or 4.69%.
  
• While conjectural, the uncanny timing of Prudential’s sales and Temasek’s purchases lead us to guess that Temasek could have likely taken out a large part of Prudential’s remaining 67,327,000 shares, resulting in continued strength of APTT’s share price despite negative news of Prudential’s cessation being a substantial shareholder of APTT.
  
• Since our initial BUY report on APTT on 13 Jan’14, the stock has risen 6.4%, outperforming the Singapore market’s 1% decline and with its still attractive dividend yield of 10% coupled with share over-hang from Prudential likely removed by Temasek and “stamp of approval” from Temasek (now a substantial shareholder with 7.58% stake), we maintain our BUY recommendation. (APTT is currently trading cum-div of 4.13 cents, which goes ex-div on 19 Mar’13)

Expansion on track

Though the economic weakness in Taiwan slowed the broadband penetration, APTT reported 4Q13 EBITDA that was in line at 2% below our forecast, underlining the stability of its business model. With capex guidelines set for the Taichung expansion, distributions have been given greater visibility. We reiterate our Add rating as a dividend yield of 10% remains attractive relative to the risk of the underlying cashflows. Our DCF-based target price is lower due to slower broadband penetration going forward. Our FY14-16 EPS is cut to reflect the higher depreciation; however, this will not affect distributions. We expect the granting of the commercial operating licence by end-1HFY14 to be a potential re-rating catalyst.

Results in line despite the drag from the economy

4QFY13 revenue was 2% below our forecast as broadband subscriber growth stalled and ARPU was weaker by 2% qoq. Management attributed the poor showing to the continuing drag from the weak economy, with households reducing costs. While the price competition from CHT in high-speed packages has been apparent, TBC still takes the lead in both speed and price. Basic cable and premium TV were also weaker though broadly in line with our forecast. We cut our FY14-15 revenue forecasts by 2% due to the lower subscriber base and ARPU. Expenses remained well controlled, allowing its asset EBITDA to expand to 65.8% in 4QFY13. We expect its margin to remain at similar levels.

DVR: a new revenue driver

We believe that management’s raised digitisation target for end-2014 from 55% to 70% (currently just 37%) was prompted by the success of the DVR-only product. We expect this to be a popular product, and our view is supported by the implied DVR-only revenues that are 45% above our forecast. We project revenues of S$3.6m in FY14, a fivefold increase yoy.

Taichung expansion clarified

Management provided further details on the Taichung expansion, reaffirming that FY14 distributions will not be impacted and that it expects an uplift from FY15. It guided for FY14 capex at S$40m-50m and S$20m-30m for FY15-16, levels that can be funded by its current debt facilities. A commercial operating licence may be granted by end-1HFY14.

APTT declared second‐half DPU of 4.13c. Consistent with our expectations, APTT reported revenue of S$78.7mil and asset EBITDA of S$51.8mil for the quarter ending Dec 2013. While APTT witnessed a weaker‐than‐expected showing in its Broadband segment, this was cushioned by sturdy Basic Cable TV and Premium Digital Cable TV growth. APTT also reaffirmed its distribution guidance of 8.25c for FY14.

Network expansion plans on track. Taiwan Broadband Communications (TBC) has commenced with its network expansion works in Q413, which will provide it with the opportunity to deliver its services to an additional 400k homes across the greater Taichung area. APTT expects to achieve network coverage of at least 30% of the homes in the new areas in the first half of 2014. Upon attaining at least 30% of network coverage of the new homes and subject to National Communications Commission’s network inspection, TBC will be able to commence commercial operations in the new areas.

Distributions will not be negatively impacted by network expansion. Capex relating to the network expansion is expected to be between SS$40‐S$50mil in 2014 and will be funded by existing borrowing facilities. The network expansion is expected to be completed in early 2016. We reiterate that TBC’s expansion across greater Taichung will not negatively impact its FY14 distributions and are currently projecting a DPU accretion of 0.2c in FY15 as a result of the expansion.

Revving up the digitization push. Premium digital cable TV remains a particularly exciting growth segment, underpinned by TBC’s ongoing digitization initiatives. TBC has attained digital set‐top box penetration rates of 40% as at end‐2013 and has increased its digital set‐top box penetration target from 55% to 70% by end‐2014.

Maintain BUY at FV S$1.01. We lower our target price as we introduce our estimates for FY16. We note that FY14 projected DPU is lower due to the absence of an excess cash balance that was available for distribution at the time of the IPO. Our projected FY14 DPU of 8.25c translates into a distribution yield of 10.3%, and this is very compelling in our view.

IPO Note

Asian Pay Television Trust (APTV) is coming to market as a high-yield play via a business trust structure, offering initial yield of 7.5% for current year and 8.5% for 2014. Given the defensive attributes of the business in a regulated industry, being the sole licensed provider of cable TV services in five closely clustered franchise areas in Taiwan, and with a growing subscriber base of over 750,000 users, we think the issue will find favour with investors in the current yield-hungry environment. Growth will be driven organically by cross-selling and bundling initiatives of its broadband and premium digital TV services. APTV intends to distribute 100% of its distributable free cash flows.

Cornerstone investors for the issue include Quantum Partners, the investment vehicle of George Soros, Prudential-linked funds, Signature Global Investors, a unit of Canada's largest investment-fund companies, and Lion Global Investors, among others. In terms of yield, APTV stacks up well against its peers, handily beating the 6.3% yield (2013) for the business trust sector and 4% for the Singapore-based telco players. We see scope for yield compression to 7.5% (2014), suggesting a fair value of SGD 1.10, representing an upside of 13% from the IPO price. Subscribe.