Calling Asian Pay Television Trust (SGX: S7OU) an unloved share probably wouldn’t be too much of a stretch.
Since it got listed on Singapore’s Mainboard exchange at a price of S$0.97 per unit in May 2013, the business trust has fallen by 7.2% in price to S$0.90 since. And, that’s happened with the Straits Times Index (SGX: ^STI) declining by just 1.6% to 3,315 points currently.
APTT’s main asset is the Taiwan Broadband Communications Group, which provides cable TV and broadband services to five franchised areas in Taiwan, namely South Taoyuan, North Miaoli, South Miaoli, Taichung City, and Hsinchu County.
At first glance, there doesn’t seem to be much to like about the business trust given its poor financials (TBC had been making losses for three straight years from 2010 to 2012) and heavily leveraged balance sheet. Indeed, even now, as of 30 June 2014, the company still has a total debt to asset EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratio of 5 – that’s normally considered a pretty high ratio as it means that the trust has total borrowings that come up to five times its annual cash flow.
But, for all the perceived shortcomings which APTT has, it does have a very desirable trait for investors: Alignment of management’s interests with unit-holders.
The trust’s Manager is led by Chief Executive Officer Robert Neale Thorpe and Chief Financial Officer Brian McKinley who together possess more than 20 years of experience in infrastructure and private equity fund businesses. As a whole, the trust’s Manager is compensated in a number of ways.
The first way is the Base Fee, which is fixed at S$7 million per year and adjusted according to changes in Singapore’s inflation rate as measured by the Consumer Price Index (CPI). The second form of compensation comes in the form of a Performance Fee and that is where shareholder alignment is found. The trust Manager is also compensated whenever APTT buys or sells any asset.
How the incentive works
From 2015 onward, APTT’s Manager earns a Performance Fee if and only if the trust’s actual Distributions per Unit (DPU) exceed a CPI Adjusted Base DPU each year. This Base DPU is taken to be the forecasted distribution of 8.25 Singapore cents for 2014; meanwhile, according to the trust’s listing Prospectus, the CPI Adjusted Base DPU is the “Base DPU after adjusting upwards for the cumulative percentage increase in the Taiwan Consumer Price Index” starting from 2014 until the financial year in which the Performance Fee is to be paid.
In addition, should the actual DPU come in less than the CPI Adjusted Base DPU for any period, the deficit shall be brought forward to the subsequent period(s) to be set-off against any excess DPU before the Manager can earn a Performance Fee.
This system puts in place very strong alignment between the trust’s Manager and its investors as the former is incentivised to grow APTT’s DPU above and beyond inflation over the long-term. For investors in a business trust, it is important because the change in the trust’s real economic value is at least partly tethered to a change in DPU.
It’s not all a bed of roses
But even though APTT might have a very desirable incentive structure from the point view of investors, it’s good to point out that it’s no magic panacea for market beating returns.
Container port business trust Hutchison Port Hldg Trust (SGX: NS8U) got listed on March 2011 and had a very similar Performance Fee structure with Base DPU and CPI Adjusted DPU components to it. Sadly though, the business trust’s total return (inclusive of gains from reinvested dividends) since its listing is actually a negative 2%. That’s in stark contrast to the STI’s price gain of 13% in the same period.
So at the end of the day, the economic characteristics of a business trust’s underlying asset(s) would still have a big role to play in determining the eventual long-term returns for investors.
But that said, investors should ignore management’s incentives only at their own peril. After all, the power of incentives is what drove investor-extraordinaire Charlie Munger to once say the following:
“Well I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.”
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.