Asian Pay Television Trust (SGX: S7OU) (“APTT”) reported its third-quarter 2018 (“3Q 2018”) earnings this morning. In addition to a downbeat set of results, APTT also stunned the market by announcing a sharp 81.5% cut in distribution per unit, from S$0.01625 per quarter to just S$0.003 per quarter.
APTT is a business trust which seeks to pay out 100% of its cash flow as distributions to its unitholders. The company’s investment mandate is to acquire controlling interests and to own, operate and maintain mature, cash generative pay-TV and broadband businesses in Taiwan, Hong Kong, Japan and Singapore. Today, APTT’s sole investment is in Taiwan Broadband Communications Group, which is a leading cable operator in Taiwan.
Here are key highlights from the trust’s latest earnings release:-
APTT saw total revenue falling by 5.5% from S$84.5 million to S$79.8 million for the quarter, with revenue falling in all three key divisions: basic cable TV, premium cable TV and broadband. Operating expenses declined by 4.3% year on year to S$53.6 million, while operating profit declined by 20.8% to S$26.2 million. Management cited challenging conditions within the pay-TV market as online TV and internet retailing gain in popularity.
Net profit attributable to unitholders plunged by 75.5% to S$2.2 million as high levels of finance costs drained away operating profit.
At the end of 30 September 2018, APTT’s balance sheet remains debt-laden with S$1.45 billion worth of borrowings while cash at bank stood was S$80.5 million. Free cash flow for the quarter was weak at S$31.8 million but was higher than last year’s S$20.3 million.
Next, we will look beyond APTT’s financial figures and focus on the trust’s operational statistics to get a better sense of how its business is doing. A common metric for telecommunication and cable TV companies would be average revenue per user or ARPU.
The table below summarizes the ARPU for APTT over the last three quarters:-
Source: APTT 2018 Third-Quarter earnings
From the above, we can see that the trust’s ARPU for all three divisions has been declining for four consecutive quarters. For the latest quarter, ARPU has between mid-single digits and high single digits. This trend does not bode well for the trust as it shows that it is earning less money per user over time.
Sharp Cut In Distributions
Previously, APTT was paying out a distribution of S$0.01625 per quarter, which implies a full-year distribution of S$0.065. Prior to the cut in distributions, its historical dividend yield based on yesterday’s closing price of S$0.315 was 20.6%.
After this morning’s announcement, APTT mentioned that this level of distribution was not sustainable in light of the challenging environment and the fact that the trust had to pay down debt. As a result, the new guidance for 2019 and 2020 distribution was drastically cut to S$0.003 per quarter or S$0.012 per year. APTT’s forward dividend yield has therefore dwindled to just 3.8%.
The reason for the sharp cut is due to management committing to “reduce dependence on borrowings and to strengthen its balance sheet”. The nine-month effective interest rate on all their debt was 3.8% in SGD terms, and total net debt to EBITDA is very high at 7.2.
Management hopes to be able to refinance the debt at lower rates and to progressively reduce debt through the retention of more cash.
Foolish Bottom Line
APTT has delivered a shocker to investors this morning.
In hindsight, the announcement was probably not surprising if investors had noticed the red flags over the past few quarters, ranging from a declining core business, weak financial numbers and ratios, elevated debt levels, weak operational metrics and insufficient free cash flows to sustain the high distribution payouts.
The lesson learnt here is to be very careful about investing in a company with a core business which is suffering. Shares that are offering a high historical yield is by no means an accurate measure of the merits of a company as distributions can always be cut suddenly and without warning.
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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston does not own shares in any of the shares mentioned.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chin Hui Leong does not own shares in any of the shares mentioned.