Asian Pay Television Trust - Slow network expansion


Softening ARPU and rising costs are key concerns
Persistent drop in premium digital cable ARPU and escalating operating and interest costs are key concerns. Network expansion in the Taichung region offers the ability to add more subscribers. However, potential delays in the expansion could minimize the upside. We revised down our premium digital cable ARPU and subscriber growth, resulting in c. 2% drop in FY16F EPS.

Higher-than-expected finance and interest costs
In 3Q15, premium cable TV ARPU continued its downward trend, dropping 3% q-o-q. However, expanded subscriber base has minimized the overall impact on revenue. Operating profitability was largely in line despite higher foreign exchange-related losses. In addition, bottom line was impacted by higher-than-expected finance and tax expenses. We have adjusted our model to reflect the higher costs.

Network expansion is slowing
Marketing operations in the new coverage areas have already commenced. However, Taichung network expansion has been delayed with some capex being pushed to FY16. Further delays could have an impact on revenues in the near term. APTT refinanced its existing debt in 1Q15 with a new 7-year c.S$1.4bn borrowing facility. This leaves another ~S$190m available for borrowing which should easily cover capex over the next two years.

Technical Analysis
Daily Chart
Valuation:
Maintain HOLD and a revised DCF-based TP of $0.77 (WACC 7.2%, terminal growth 0%). Given that expansion capex is funded by debt (not operating cash flow) and over 90% of its debt is hedged at fixed interest rate till 2017, we see little risk to 10% dividend yield over the next 2 years.

Key Risks to Our View:
Competition and weak economy could stifle network expansion. The total addressable market in the new coverage areas exceeds 400k homes. However, stronger competition and a weaker economy could dampen efforts to gain market share. (Read Report)

Source : DBS Group Research

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