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After Falling 11% In 6 Months, Is Asian Pay Television Trust Possibly A Bargain?

Asian Pay Television Trust (SGX: S7OU) closed at S$0.795 per unit yesterday after falling by 11% over the last six months.

With the double-digit percentage tumble, is Asian Pay Television Trust, which owns broadband, cable TV, and digital TV assets in Taiwan, possibly an undervalued business trust? Let’s find out.

The art of value

The value of a stock should be a key deciding factor for investors when it comes to making an investing decision.

There are two main ways for investors to estimate the value of a business trust. One method works forward, in that an investor will try to estimate the growth rates that a business trust will achieve in important financial metrics like its earnings per unit, distributions per unit, or cash flow per unit.

The other works backward, in that we can look at a business trust’s current price and work out how much growth the market’s expecting the trust to achieve. From that, we can determine if the market’s expectations are reasonable or ridiculous.

Moving backwards

In this example, we’d be using a variant of a simple dividend discount model called the Gordon Growth Model to figure out how much growth in distributions the market’s expecting Asian Pay Television Trust to achieve.

A dividend discount model is meant to value a company based on the total amount of dividends that the firm would distribute to shareholders in perpetuity; the Gordon Growth Model simply adds in a factor to account for a company’s future growth in dividends. The formula for the Gordon Growth Model is shown below:

Share Price = Expected Dividend Per Share One Year From Now / (Discount Rate – Dividend Growth Rate)

Asian Pay Television Trust’s annual distribution for its fiscal year ended 31 December 2014 (FY2014) is 8.25 cents. In its latest earnings release for the first-half of FY2015, the trust had reaffirmed that its distribution for the entire year will be “at least 8.25 cents per unit.” So, let’s take 8.25 cents to be the trust’s DPU for the whole of FY2015 in this exercise.

As for the Discount Rate, the textbook method – which follows the Capital Asset Pricing Model (it’s perfectly acceptable to not follow the CAPM when trying to estimate the value of a stock, but I’d still use the model in here for the sake of completeness) – is to incorporate the risk-free rate as well as the beta of Asian Pay Television Trust.

The risk-free rate is normally taken to be the 10-year government bond yield; currently, the yield on a 10-year Singapore government bond is around 2.5% and so, that shall be our risk-free rate.

Meanwhile, the beta of any stock is simply a measure of a stock’s volatility in relation to a broad market index. But in Asian Pay Television Trust’s case, its listing history is still too short to have a reliable beta estimate (the trust was listed only in May 2013). As such, we will take its beta to be 1.0, which basically means the trust has the same volatility as the broader market.

With the explanations out of the way, here’s how the formula for the Discount Rate looks like:

Discount Rate = Risk Free Rate + Beta (Market Return – Risk Free Rate)

You’d notice that there’s one last variable in the Discount Rate formula which I have not discussed, and that is the Market Return.

The Market Return is simply the long-term return of the stock market as a whole. In this exercise, I’d be using the long-run return of the SDPR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI). Since its inception in April 2002, the SPDR STI ETF has generated a total annual return (inclusive of reinvested dividends) of 6.69%.

So, when we input all the relevant figures into the Discount Rate formula, we’d end up with a Discount Rate of 6.69% for Asian Pay Television Trust.

The next thing we have to do now is to punch all the numbers we have obtained so far into the Gordon Growth Model. This is what we’d end up with:

0.795 = (0.0825) / (0.0669 – Dividend Growth Rate)

As you can see, the only variable that’s now unknown in the Gordon Growth Model is Asian Pay Television Trust’s future growth in distribution. Some basic arithmetic will show that the market expects the trust’s DPU to decline at an average pace of 3.69% over the long-term future.

So what’s the value?

The expected growth rate of (-3.69%) can then be compared against our own assessment of what Asian Pay Television Trust may be able to achieve. Historically speaking, Asian Pay Television Trust’s DPU had declined by 7.6% from FY2013 to FY2014.

So, based on all the above assumptions, if you expect Asian Pay Television Trust to be able to grow its distributions at a faster clip than (-3.69%) annually, the trust will be undervalued at S$0.795. But, if you’re not confident at all about Asian Pay Television Trust’s growth and think that its future distributions will decline at an even steeper pace, then S$0.795 might be too high a price to pay.

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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 Stanley Lim doesn’t own shares in any companies mentioned.