Monday 20 May 2024

Asian Pay TV Trust: A Dividend Bagger

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.

Thursday 16 May 2024

Portfolio Update: Sale in HK Dividend Stocks, Purchase of Singapore Shares

This is an ad hoc update on my portfolio because of significant changes.

I have divested shares in Alibaba, China Construction Bank and Ping An. 

Due to PRIME's improvement in situation, I have added 100,000 shares. Yanlord and Nanofilm saw additions to ensure my exposure to China remains about the same.

Last a new company has been added call Asian Pay TV Trust (APTT). The company is highly leveraged but is gradually paying the debts down. It is guiding for 1.05 cents annual dividends which I think is attainable despite a declining TV business in Taiwan. It will form part of my dividends. 

Overview of my portfolio as follows:

PRIME US REIT: Sale of 01 Building Makes it Safe and Management Confident of Refinancing

Yesterday's announcement saw PRIME REIT divesting One Town Centre (OTC) at about 3% lower than its valued price at end 2023.

As said in my earlier post, PRIME US REIT needs to sell 1 to 2 buildings to ensure the financial safety of the REIT. This has happened and I am confident the REIT can stay afloat.

Refinancing Risk

A $478 million debt is due. During the latest AGM, the CEO said he is confident that the refinacing will be completed by the deadline of July 2024. With the sale of One Town Centre conciding with expiration of the current debt, what I am infering is that the new debt principal will likely be of a smaller amount (probably a $450 million loan).

However, with OTC sale and adequate cash balance, it is likely a refinancing can be completed in time.

Current Loan Profile

What many investors do not see is that the OTC loan is the most expensive loan on PRIME REIT's book at SOFR + 1.65%. In addition, with the leftover cash from One Town Centre's sale, PRIME REIT will use it to repay some of the due July 2024 loan principal.

For the refinanced loan, I do not expect a SOFR+1.15% margin. My expectation is that it will be a SOFR+ 1.7% loan similar to that of Sorrento Towers/One Town Centre. Furthermore $155 mil of PRIME's hedging will be lost  This mean despite the pay down in loan principal and cancellation of One Town Centre's loan, PRIME REIT's interest expense year on year will not fall. Instead I expect further rise in interest expense to about US$30 million per year.

Cashflow and Dividends

Interest expense is US$30million. Manager base fee is US$6.2 million, Trustee Fee is US$2 million.

The loss of OTC and decline in occupancy could place NPI at about US$82 million. CAPEX should remain at US$24 million.

This means the REIT is in a position of generating US$20 million of cash this year. With plans to strengthen the REIT's equity and pay down the loan, a significant portion of cash could be retained. I will not be surprised PRIME REIT pays out only a dividend of 0.5 cent per share for the full year. I do not want to see PRIME US doing another share bonus because it does nothing for shareholders. 

Give 0.5 cent dividend and explain it or otherwise...

Dividend of 90% of Taxable Income to Get Tax Breaks

During AGM, the CFO revealed in order for the REIT to continue achieving tax breaks from USA, they have to pay out 90% of the taxable income. In my view, PRIME might be able to earn US$25 million in taxable income this year. 

This means an approx US$22 million in dividends could be given to shareholders. If this holds true, this translates to a dividend of 1.6 cents per share for the full year.

This will be great news. But given the situation the REIT is in, I will not be surprised PRIME opts for a 0.5 cents dividend this year instead of 1.6 cents dividends. A 1.6 cents dividend may force PRIME to increase its borrowings due to cashflow. So I am expecting the worse case scenario where the REIT only announces 0.5 cents per share in dividend.

I do not agree with this but given the prudence the REIT has to be in, a 0.5 cents dividend look likely. I personally prefer the REIT to divest off another building and refrain from doing anymore office space acquisition forever to slowly delever