Jasmine Broadband Internet
Bualuang Securities Market concerns greatly exaggerated - dividend yield above 10% UNDERWEIGHT
Investment thesis
We believe that market concerns over JAS selling its stake in JASIF, the TTTBB’s ability to service rentals to JASIF and the speculation that JASIF will build its own telecom towers are either mistaken and overly exaggerated. The price tumble presents good timing to accumulate JASIF with the highly attractive dividend yield of 10.9%. Our BUY rating stands.
Three-year lock-up period for JAS holding in JASIF
Market jitters based on concerns that JAS might immediately sell its current 33.33% equity stake in JASIF are unfounded. JAS is subject to a lock-up period in that it must hold at least 1/3 of its stake in JASIF (or 33.33%) during years 1-3 and at least a 19% stake in JASIF during years 4-6. JAS remains committed to holding a 33.33% stake in JASIF. If there were any risk of JAS lowering its stake in JASIF in the future, it would have to take place in the fourth year.
Solid TTTBB cash flow to service JASIF rentals
Furthermore, worries over TTTBB’s ability to service the rental expense of optical fiber cables (OFC) is also inflated. TTTBB, a JAS indirect subsidiary—JAS holds a stake in Acumen and Acumen holds a stake in TTTBB—is the entity that pays rental expense to JASIF, not JAS. When JAS Mobile Broadband Co Ltd, another JAS subsidiary, won the overpriced 900MHz license at the price of Bt76bn, the market was concerned that JASIF’s steady rental income streams might be affected. We believe that the market is mistaken. JAS Mobile Broadband’s expected new debt incurred from winning the 900MHz license is irrelevant to TTTBB’s cash flow ability to service the rental income payable to JASIF. We estimate that TTTBB’s strong operating cash flow of about Bt5-6bn/annum can service the rental income of Bt5-6bn/annum to JASIF during 2016-17.
JASIF cannot build its own assets
Based on SEC filings, an infrastructure fund cannot build its own assets but is allowed to expand its fund size or raise debt of up to three times debt-to-equity ratio to facilitate the fund’s ability to buy more assets from other parties. Hence, the market concern that JAS will instruct JASIF to build the telecom towers by itself and lease them to JAS Mobile Broadband is incorrect. It is possible that JASIF can raise more debt or expand its fund size to buy JAS Mobile Broadband’s telecom towers and then lease them back to JAS Mobile Broadband. However, it would be subject to the approval of unit holders, which will likely approve the move if the return from doing so were higher than before.
Risk of lower rental rate of secondary contract after three years
The secondary contract, which includes only the 20% of the OFC capacity, will expire in the next three years and then can be renewed for the next three years. The risk of negotiating for lower rental rate after the contract expires was addressed in the SEC filing since the IPO.
