Can Asian Pay Television Trust Keep Up Its 11% Distribution Yield?

For dividend investors, Asian Pay Television Trust (SGX: S7OU) might be a familiar name. After all, the business trust has a big distribution yield of 11% based on its closing price of S$0.75 yesterday and 2014 dividend of 8.25 Singapore cents per unit.

However, is such a high distribution yield really sustainable for the trust?

The business behind the trust

Asian Pay Television Trust’s business interest provides basic cable TV, digital cable TV, and broadband services in Taiwan.

Even though the nature of its business might seem stable, the level of profitability isn’t. This is due to Asian Pay Television Trust’s high debt which lead to significant interest expenses that eat into the trust’s overall profitability.

Shackled by debt

As of the quarter ended 30 September 2015, Asian Pay Television Trust had a net debt to equity ratio of 89% (where net debt refers to total debt minus total cash).

Over the last twelve months, the trust’s total interest expense came in at S$72.7 million. With an operating profit of just over S$150 million for the same period, Asian Pay Television Trust thus has an interest coverage ratio (operating profit divided by interest expense) of just 2. That’s a rather risky position for Asian Pay Television Trust to be in, in my opinion, as there isn’t much room for error.

In 2014, the trust had paid out 8.25 Singapore cents per unit in distribution as mentioned earlier. This exceeded both the trust’s earnings and free cash flow as you can see in the table below:

Financial metric Number in 2014
Earnings per unit 8.0 Singapore cents
Free cash flow per unit 3.8 Singapore cents
Distribution per unit 8.25 Singapore cents

Source: S&P Capital IQ

For 2015, Asian Pay Televsion Trust’s management had given guidance that they intend to keep the distribution at the same level as 2014 even though profit in the first nine months of the year had already declined.

Thus, one way for management to sustain the high distribution payout is by taking on more debt – but that will very likely intensify Asian Pay Television Trust’s existing problems of having high debt and interest expenses.

Another possible method to continue the high distribution payouts would be to raise equity capital from new investors. But this strategy does not seem to be sustainable in the long term.

The only other way is for management to hope that Asian Pay Television Trust’s underlying business improves such that it can grow its way out from the shackles of debt. Unfortunately, hope is not a strategy.

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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.