Asian Pay Television Trust (APTT) Dividend Yield Cut from 20% to 3.8%
- Original Post from Investment Moats

I always had one eye on Asian Pay Television Trust (APTT).


So did some of my friends. It is the ultimate Financial Independence Porn Stock.


Why is this so?


To find out how much you need for financial security, or financial independence or retirement, you can read my article here to determine your number.


From the article we get the following formula:


Wealth Required for FS/FI/RET= Annual Expense/Rate of Return of Your Wealth Machine(s) to Generate Cash Flows for FS/FI/RET


APTT pays a quarterly dividend and the last guided dividend was $0.01625. Annualized the dividend is $0.065.



The price chart above shows the current share price to be at $0.315.


Dividing the dividend per share by the share price we arrived at a dividend yield of 20.6%.That is a whopping dividend yield!


Now according to the formula, and my annual expense is $24,000/yr, the all I need is for APTT to deliver consistently this 20.6% dividend yield and for APTT to grow and keep up with a 3% inflation rate. The total return is 23.6%/yr.


So the amount that I need to reach financial independence is 24000/0.206 = $116,504.


That is a unbelievable sum of money.


You could really motivate someone by telling them, hey just save hard, put your $25,000/yr wealth building effort into APTT for 4.5 years and you will reach financial independence.


The problem is can they keep up with this?


Article in 2015 showed adequate warning about the dividend sustainability


In December 2015, I wrote about APTT yielding a dividend yield of 12.5% and its sustainability.


If you use that 12.5% dividend yield and the FI formula, you would get 24000/0.125 = $192,000. That is not too shabby as well.


However, the share price then was doubled what it was now at $0.64 and the annualized dividend was $0.08. The share price have fallen by more than 50%, the dividend per share has fallen as well.


Back then, we saw that its free cash flow per share, which is the cash flow that APTT legitimately will generate from its cable and broadband business could not sustained that $0.08 dividend.


I will continue my thoughts about financial independence with APTT later.


The warning then would have told you, there is a price to pay for that high dividend.


Usually it is not sustainable.


The best way to tell dividend sustainability is to check its free cash flow over a period versus the dividend income it pays out to the shareholders. The free cash flow should cover the dividend. And the free cash flow should be either keeping inline, or growing.


APTT have shown clear signs that it isn’t.


Dividend Per Unit to Be More Conservative. Means Dividend Cut.


In APTT’s third quarter report this morning, management announced that they would like to take a more cautious approach to paying dividends.



In the slide above it shows you the historical dividend pay out. If the IPO is $0.92 and they pay out $0.43, the share price is still underwater.


The quarterly dividend will be reduced from $0.01625 to $0.0030. That is a massive reduction in dividend.


If we annualized the dividend to $0.012 per year, the current dividend yield is 3.8%!


Usually the market demands a particular return depending on the growth prospect of the company, the riskiness of its business model and relative to the risk free rate.


Now I am not sure what the market demands, but I suppose I do expect the demanded dividend yield to be closer to 7.5% to 10%.


With this dividend return, the share price might fall to a range of $0.12 to $0.16.


APTT currently has 1436 mil in outstanding shares. To pay out $0.012 dividend per unit per year, they would need $17.23 mil in free cash flow.


If I take the operating cash flow before working capital – taxes – capital expenditure (both investment and maintenance) – interest cost, I can see them earning an annualized $65 mil.


That is $0.045 in free cash flow per share, which puts current free cash flow per share yield to be 14%.


I think based on free cash flow per share yield, its share price might not plunge to $0.12 to $0.16 as I said previously. By any measure, 14% free cash flow yield is attractive.


There might be some light at the end of the tunnel here.



APTT issue is that the business have been struggling. Its main business is in providing basic cable TV to a few areas in Taiwan. That have been the staple entertainment consumption in Taiwan for some time but there is a push towards digital and analogue are being switched off.


So from the result you can see that basic cable TV RGU is down, but Premium digital cable TV and broadband services are up.


The problem is that ARPU across the board is down.



Thus, we see that across all three segments, revenue is down. But got to say that is some good EBITDA margins considering the local telecom operators have only 30% EBITDA margins.



APTT have been borrowing to fund its investment capital expenditure. That is not unsound if that it leads to future earnings growth. However, they been doing this for some years, yet what we are seeing is mainly shoring up the earnings, if not the earnings are going down.


Supporting capital expenditure through free cash flow is more prudent but my gripe is that even the investment capital expenditure at this point looks like replenishing a cable business that is being cannibalize by digital business (with even lesser barriers to entry with OTT streaming).


Summary


I think what the management is doing is more prudent, and this should be the approach to take.


What drives the dividend is the cash flow, which is driven by the operating business. So when you evaluate a dividend stock, don’t just look at the dividend yield but the cash flow and the business.


Understanding the cash flow and the business would have given you enough misgivings to try your luck with APTT.


If you ask me why I had an eye on APTT despite all this, its partly because my history with APTT goes way back to its MIIF days, and I can’t stop the yield whore nature in myself. However, I also had an eye because I would ask myself the question: “could APTT reach a terminal state where its zero growth, sustainable business but attractive free cash flow?”


Quite possibly.


Lastly, if we go back to the topic of a dividend stock and financial independence, I would say don’t just apply that formula blindly.


You could find a high yield stock and use it in that formula, and you would get a more motivating lower wealth target to accumulate to.


However, like in this example, your dividend is going to be cut and that would mean your financial independence system fails.



  1. Find a sustainable business with consistent or growing free cash flow

  2. A lower payout ratio is better


You will find that your FI system is more conservative.


For example a stock that trades at 10% earnings yield with a sustainable business model. It pays out 4% dividend yield. I think you could use a 4% to form your wealth target.


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$Asian Pay Tv Tr(S7OU.SI)

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32 likes
93 comments
tanmingwang

i went to see the financial statmenet. the 9M earning per share 1.05 cents. Assuming it is same per quarter, company will earn 1.4 cents per share. they can lay 1.2 cents if the free cash flow is ok, but this is 85% of their profit.

revenue and profit has been dropping. will it worsen?

lkhwee

Long essay, say like no say. So is buy or sell?

Jebus

Reply to @lkhwee : U must be a big boss :D

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edsim

dividend this quarter still 0.01625 , next yr then start 0.003. so still ok for this current price of 0.16. 10% yield:)

edsim

Reply to @layers : at least price drop to justify the future yield loh. short pain better than long pain

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fasttwitch

Hmm...I wonder if some company will use this opportunity to offer a low ball privatization prize than is below NAV.

TheMAOZD

Reply to @fasttwitch : Like many people have mentioned, the nav are mainly intangibles.

And the problem with making valuations based on cashflow is also the nature of business APTT is in. In a high interest rate environment, and with a history of declining revenue, it is hard to estimate how much APTT will generate in CF.

Given that estimates can swing in the 20% region, it will have to take hell lots of margin of safety before I will consider initiating a position.

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Sporeshare

It reminds me of Rickme rTr . High yield trap! Now kaput!!

Sporeshare

Reply to @layers : What about KepInfa TR? Looks shaky

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fasttwitch

May I know what is the difference between NAV at group and thrust level ? Which one is more relevant to investor ? Thanks.

layers

Reply to @fasttwitch : always look at group

miketak

Stock price now down until dividend yield becomes attractive again

christophertan0

Wah it is really being whacked.. I’m gonna stay out.. I was attracted by the dividend yield at this price but not sure what’s gonna happen

LadyOctopus

this type of plunge and the vol... hmmmm BB at play?

inspirez

The CEO is probably doing the most sensible thing by trying to improve the trust balance sheet and debt. The sharp drop in distributions is substantial, 长痛不如短痛?

Good to know that the trust is trying to grow the business rather than staying stagnant and continue to pay high dividend to an eventual bankruptcy..

Vested some at $0.32.

TheLoneWolf

Reply to @inspirez : Dont trust mgmt....have you forgotten the spin doctors? If can, would have already done it years ago. Many of these mgmt characters are just employees.

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