Similar to the US Office REITs, Asian Pay TV Trust (APTT) is suffering from a period of high interest and high leverage (but as it is not a REIT, it is not constrained by the 50% leverage limit, so not force selling is happening but has to pay corporate taxes).
The trust has a disastrously high debt load to equivalent of SGD$1.22 billion or 58% debt ratio. For now the trust is first using its cashflow to pay down its SGD debt which has a higher interest rate
Cashflow Generation Ability
APTT is in the Television and Broadband industry within North and Central Taiwan. It is in a highly regulated industry where new entrants find it difficult to enter unless Taiwan issues them the license.
No doubt it has a utility-like trait but in recent times, APTT's TV customer number has been falling. And with that, so has its revenue in the TV segment.
As evident, revenue has declined due to its shrinking Cable TV business. EBITDA, a measurement of its cashflow has thus shrank. While the trust generated $153 million in cash from its operations last year, I am forecasting APTT's revenue and cashflow are going to shrink 3% annually. This is because its rise in broadband business has not been able to offset the cable TV segment.
For this full year, APTT could generate $149 million in cash from its operations. Its CAPEX should remain at $35 million outflow. Factoring annual interest expense of $44 million and income taxes of $20 million, APTT should generate free cash of $50 million. As of now, the trust is distributing $19 million as dividends to unitholders. The trust has guided for $46 million to be used to pay down debts, so I expect a decrease in 3% of loan/interest expense.
However, let's not forget its revenue is shrinking as well at forecasted 3% annually. With CAPEX unable to be cut and interest expense shrinking in line.
Expectation of Future Cashflow
I expect APTT to face shrinking cashflow of about SGD$3 million per year. This means $47 million cash generated next year after factoring all cash outflows.
Can the Dividend Be Sustained?
APTT has guided for 1.05 cents annual dividend. This amount to SGD$19 million in cash outflow. In my view, this dividend can be sustained for at least a decade. With interest rates expected to decline and APTT paying down 2-3% of its debts annually, the trust should be able to generate the free cash to support the dividend.
Future Interest Rates Should Drop and Leverage Ratio
In the latest AGM, the CEO has conceded its current leverage is not ideal and the trust will be paying down debts. While no desired leverage ratio is mentioned, I sense a lot depends on its goodwill amount and a 50% debt limit. Due to APTT's declining business, its goodwill is likely to suffer another round of impairment in the next few years. Hence I do expect the current $2 billion asset base to decline to pherhaps a $1.5 billion base. This means a future debt load of about $750 million.
Fortunately with the expectation of a decline in global interest rates in the next few years, interest expense should reduce and debt repayment can be accelerated.
What Investors Should Expect
1.05 annual dividend is sustainable. However, I do not think APTT will increase it. At current price of 8 cents, this translates to a 13% yield.
No doubt, the risk is that APTT's business will decline faster than its current 3%+ annual rate. However, I feel given the information, a 13% yield is too generous. APTT could move to an 8% dividend yielder and should interest rates start to fall, it could compress into a 6% dividend yielder. Based on my thoughts, the target price range for APTT is 13-17 cents. Should APTT continue to annouce a 1.05 cent annual dividend, the market could appreciate the company to this price range.
