Asian Pay Television Trust (APTT)

[tanjm]

I briefly looked at the report. Its just a one pager with assertions made without demonstrating anything in detail.

It also ends on an amusing note. Along the lines of "If I am wrong about my assumptions, then my target price is $1.09."

In other words, despite the headline, the "target" price is really between 0.75 and 1.09.

LOL

Even more amusingly, the mid point of this price range is 94 cents - around the price it achieved until recently!

[buffetlunch]

GreedandFear - thanks for your post.

The link to the report isn't working. Do you mind posting a working link? Thanks!

(1) It seems clear that dividends are being financed by borrowings as EPS < DPS for the past two years (even more so if you consider adjusted EPS in FY14 to adjust for addition to earnings due to reversal of tax provision). Whilst true that APTT has refinanced its borrowings until 2017, using borrowings to finance dividends means the following.

(a) As total liabilities increase, NAV and shareholders' equity will decrease. So whilst you as investor pocket the dividend, the capital in theory diminishes (because NAV decreases). It's like taking from the right pocket to put in the left pocket. It seems the "true" dividend yield would be lower if borrowings are not used to finance dividend payouts.

(b) The increase in borrowings will lead to higher interest cost. For every $100m used to finance dividend payouts, this is $4m more in interest payments per year. This is about 3.4% of the amount of cash distributed to unit holders.

(2): this is news to me. There is no way I or investors like me can verify whether this is actually the case (in the sense of being likely to happen), or whether this is speculative (bearing in mind there are degrees of speculation and hearsay).

However, the way I look at it is that there are a number of bugbears and this just adds to it.

First and foremost are the points mentioned in (1) above.

Then we have the massive tax bill ($42m) which was settled around June 2014, and the company had (or should I say, chose to) to borrow to pay that too rather than reducing dividends.

There is a double-barreled threat company is facing as far as competition in Greater Taichung goes:

(a) new entrants coming on board in Taichung City (Vee Time and West Coast have already passed the 30% network establishment threshold and have started marketing) and

(b) APTT most likely not being able to meet its target of 35% market share in Greater Taichung excluding Taichung City (i.e. the "expansion area") - there is nothing concrete to suggest to me this target can be met other than an assertion on the part of management.

For this reason, one cannot assume free cash flow will be sufficient to support the present 8.25c worth of distribution per year, and this goes back again to my point above the consequences of dividends being financed by borrowings. If dividend yield drops by 1 to 2%, you might still have a good yield of 7-8%, depending on what price you bought in at. But in real life, the share price will also drop once a "yielder" suffers a dividend cut, so capital loss is likely.

FYI, JP Morgan in their 7 Nov 2014 report say APTT has a low chance of gaining revenue in the expansion area, and also a low chance of losing revenue from existing franchise areas. If true, this means free cash flow will not be enough to support the present 8.25c distribution without borrowings to finance the dividend.

Accounting is also not straightforward and time consuming to work out and understand. Various ajustments have to be made to understand the true picture - e.g. for the reversal of tax provision to earnings; and also to the FY13 financial statement as this is not for a full year (important to understand as this was the first operational period post IPO). If you look carefully at FY13 annual report, you will see on p 75 of FY13 Annual Report, it is stated that: “These financial statements do not reflect the distribution for the six months ended 31 December 2013, which will be accounted for in total equity as an appropriation of retained earnings in the financial year ending 31 December 2014”. Why take earnings from 2014 to pay 2013 dividends? BTW, I also have looked at the financial statements for the pre-IPO period and the number and size of adjustments that have to be made to those to get the true picture is significant (even though a number of the adjustments should rightfully be made).

The regulatory environment in Taiwan is, shall we say, challenging. As we all know there are nation wide and regional price caps. Further the company is subject to "mandatory" capex for the digital set top box rollout to help the Taiwanese government in its digitisation push (a form of national service, if you know what I mean). Did I mention the $42m tax bill (original provision for this was around $128m!)? As your point (2) shows, there are likely to be other regulatory risks which, for individual investors like me, are best described by the phrase "we don't know what we don't know".

The company's biggest asset is intangible (i.e. cable operating licence), and this makes up the bulk of the NAV. This is related to regulatory risk as the licence is granted by the Taiwanese government.

(2) to (5) in GreedandFear's above post are repeated to the extent I haven't already covered them.

Add to the mix interest rate risk, as APTT's borrowings are pegged to Taiwan commercial paper. Whilst the CP rate is presently low, I have looked at this historical chart (5, 10, 25 and 25 years), and can say life will be difficult when rates start to rise again. Hedging costs may go up, for starters. I do not know what kind of terms APTT can re-finance on in 2017. There might be a cash call. This might be a "bad" kind of cash call, in the sense that APTT might need more cash just to continue operating as it was before (i.e. no marginal ROI with the extra money coughed up).

Cumulatively, I don't have a good impression. Warren Buffet recently said there is never just one cockroach - if you see one cockroach, you will soon see his sister, cousins and other relatives.

Vested - is there anyone here who can give me a good reason why I shouldn't sell and take profit?

[valuebuddies]

Interesting report from a young chap

http://www.nextinsight.net/index.php/sto...-with-sell

[GreedandFear]

My original link to the full AM Fraser report was not working. The below link leads you to the 1 page synopsis. At the bottom is a link to the full report (and for someone reason, this link doesn't work if copied so you need to do a two step process....)

http://singaporestockmarketnews.blogspot...ering.html

[GreedandFear]

GreedandFear - thanks for your post.

The link to the report isn't working. Do you mind posting a working link? Thanks!

(1) It seems clear that dividends are being financed by borrowings as EPS < DPS for the past two years (even more so if you consider adjusted EPS in FY14 to adjust for addition to earnings due to reversal of tax provision). Whilst true that APTT has refinanced its borrowings until 2017, using borrowings to finance dividends means the following.

(a) As total liabilities increase, NAV and shareholders' equity will decrease. So whilst you as investor pocket the dividend, the capital in theory diminishes (because NAV decreases). It's like taking from the right pocket to put in the left pocket. It seems the "true" dividend yield would be lower if borrowings are not used to finance dividend payouts.

(b) The increase in borrowings will lead to higher interest cost. For every $100m used to finance dividend payouts, this is $4m more in interest payments per year. This is about 3.4% of the amount of cash distributed to unit holders.

(2): this is news to me. There is no way I or investors like me can verify whether this is actually the case (in the sense of being likely to happen), or whether this is speculative (bearing in mind there are degrees of speculation and hearsay).

However, the way I look at it is that there are a number of bugbears and this just adds to it.

First and foremost are the points mentioned in (1) above.

Then we have the massive tax bill ($42m) which was settled around June 2014, and the company had (or should I say, chose to) to borrow to pay that too rather than reducing dividends.

There is a double-barreled threat company is facing as far as competition in Greater Taichung goes:

(a) new entrants coming on board in Taichung City (Vee Time and West Coast have already passed the 30% network establishment threshold and have started marketing) and

(b) APTT most likely not being able to meet its target of 35% market share in Greater Taichung excluding Taichung City (i.e. the "expansion area") - there is nothing concrete to suggest to me this target can be met other than an assertion on the part of management.

For this reason, one cannot assume free cash flow will be sufficient to support the present 8.25c worth of distribution per year, and this goes back again to my point above the consequences of dividends being financed by borrowings. If dividend yield drops by 1 to 2%, you might still have a good yield of 7-8%, depending on what price you bought in at. But in real life, the share price will also drop once a "yielder" suffers a dividend cut, so capital loss is likely.

FYI, JP Morgan in their 7 Nov 2014 report say APTT has a low chance of gaining revenue in the expansion area, and also a low chance of losing revenue from existing franchise areas. If true, this means free cash flow will not be enough to support the present 8.25c distribution without borrowings to finance the dividend.

Accounting is also not straightforward and time consuming to work out and understand. Various ajustments have to be made to understand the true picture - e.g. for the reversal of tax provision to earnings; and also to the FY13 financial statement as this is not for a full year (important to understand as this was the first operational period post IPO). If you look carefully at FY13 annual report, you will see on p 75 of FY13 Annual Report, it is stated that: “These financial statements do not reflect the distribution for the six months ended 31 December 2013, which will be accounted for in total equity as an appropriation of retained earnings in the financial year ending 31 December 2014”. Why take earnings from 2014 to pay 2013 dividends? BTW, I also have looked at the financial statements for the pre-IPO period and the number and size of adjustments that have to be made to those to get the true picture is significant (even though a number of the adjustments should rightfully be made).

The regulatory environment in Taiwan is, shall we say, challenging. As we all know there are nation wide and regional price caps. Further the company is subject to "mandatory" capex for the digital set top box rollout to help the Taiwanese government in its digitisation push (a form of national service, if you know what I mean). Did I mention the $42m tax bill (original provision for this was around $128m!)? As your point (2) shows, there are likely to be other regulatory risks which, for individual investors like me, are best described by the phrase "we don't know what we don't know".

The company's biggest asset is intangible (i.e. cable operating licence), and this makes up the bulk of the NAV. This is related to regulatory risk as the licence is granted by the Taiwanese government.

(2) to (5) in GreedandFear's above post are repeated to the extent I haven't already covered them.

Add to the mix interest rate risk, as APTT's borrowings are pegged to Taiwan commercial paper. Whilst the CP rate is presently low, I have looked at this historical chart (5, 10, 25 and 25 years), and can say life will be difficult when rates start to rise again. Hedging costs may go up, for starters. I do not know what kind of terms APTT can re-finance on in 2017. There might be a cash call. This might be a "bad" kind of cash call, in the sense that APTT might need more cash just to continue operating as it was before (i.e. no marginal ROI with the extra money coughed up).

Cumulatively, I don't have a good impression. Warren Buffet recently said there is never just one cockroach - if you see one cockroach, you will soon see his sister, cousins and other relatives.

Vested - is there anyone here who can give me a good reason why I shouldn't sell and take profit?

Hi - I agree that there are lots of hair and we each have to decide whether the returns are worth it. Just wrt interest rate risk, the company did enter into interest rate swaps to 2017 or 2018 to fix the floating rate, so, for the next few years we should be ok but I agree that this is a major risk down the road.

[tanjm]

Does not seem like anyone actually read the latest financial statement because you guys talk about its 2017 loan, when the latest statement it says specifically that the trust has just entered into an agreement to refinance borrowings for 7 years under materially the same terms.

Let's take the other assertions made.

Just because EPS < DPS does not mean that the trust is paying dividends out of borrowings. Or rather that is misleading. DPS is clearly stated to be paid out of free cash flow. EPS includes, most significantly depreciation, which is essentially can be said to be deferred capital expenditure. So while in a sense, this could be twisted to say it is from borrowings (or rather borrowings in future), it belies the true picture.

Let's do the numbers.

Operating Profit is 193 mio. This should be fairly steady.
Interest costs are 44 mio
Steady state taxes are a bit more difficult because the accounting statement accrues them, but I figure 22 mio a year is about right based on the accrual of last qtr of 2014.

So free cashflow is then 129 mio, or 9 cents per share. Enough to pay dividends without dipping into current borrowings.

It is true that ignoring the depreciation belies the need to raise funds later on. So let's add that in to get the effective distribution after setting aside (virtual) funds to pay for capital expenditure. At 48 mio, thats 3.4 cents per share. Thus we arrive at 5.7 cents per share. And that is probably what the original article refers to in a very sensational way (a cynic might speculate that this is on purpose to drive market activity).

But I would argue that the share price already built this in. 9-10% is after all a very high yield. Even with 5.7 cents a share, this is a respectable 6.3% yield (assuming 90 cents a share) for an asset that is relatively stable in yields. We pay between 6-8% for REITS with leasehold properties after all.

There is indeed regulatory risk. But that is something we know about - and no one, not even a smart aleck analyst in a broking firm - can predict. What I do know is that regulators have to look out for both consumers and businesses in a fair way. And Taiwan is a fairly commercially reasonable country.

[GreedandFear]

Does not seem like anyone actually read the latest financial statement because you guys talk about its 2017 loan, when the latest statement it says specifically that the trust has just entered into an agreement to refinance borrowings for 7 years under materially the same terms.

Let's take the other assertions made.

Just because EPS < DPS does not mean that the trust is paying dividends out of borrowings. Or rather that is misleading. DPS is clearly stated to be paid out of free cash flow. EPS includes, most significantly depreciation, which is essentially can be said to be deferred capital expenditure. So while in a sense, this could be twisted to say it is from borrowings (or rather borrowings in future), it belies the true picture.

Let's do the numbers.

Operating Profit is 193 mio. This should be fairly steady.
Interest costs are 44 mio
Steady state taxes are a bit more difficult because the accounting statement accrues them, but I figure 22 mio a year is about right based on the accrual of last qtr of 2014.

So free cashflow is then 129 mio, or 9 cents per share. Enough to pay dividends without dipping into current borrowings.

It is true that ignoring the depreciation belies the need to raise funds later on. So let's add that in to get the effective distribution after setting aside (virtual) funds to pay for capital expenditure. At 48 mio, thats 3.4 cents per share. Thus we arrive at 5.7 cents per share. And that is probably what the original article refers to in a very sensational way (a cynic might speculate that this is on purpose to drive market activity).

But I would argue that the share price already built this in. 9-10% is after all a very high yield. Even with 5.7 cents a share, this is a respectable 6.3% yield (assuming 90 cents a share) for an asset that is relatively stable in yields. We pay between 6-8% for REITS with leasehold properties after all.

There is indeed regulatory risk. But that is something we know about - and no one, not even a smart aleck analyst in a broking firm - can predict. What I do know is that regulators have to look out for both consumers and businesses in a fair way. And Taiwan is a fairly commercially reasonable country.

I am well aware that APTT have a new and longer loan. The original loans were floating rate based but the company hedged them all into fixed rate via an interest rate swap. The new loans are on materially the same terms, so, presumably also floating rate but you will probably have noticed that they have not made any announcements as to whether they have also extended the interest rate swaps. I am assuming that this means that they have not. In which case, the company is exposed to rising interest rates once the original swaps mature in 2017. If I am wrong, then that would be good news....

[tanjm]

I am well aware that APTT have a new and longer loan. The original loans were floating rate based but the company hedged them all into fixed rate via an interest rate swap. The new loans are on materially the same terms, so, presumably also floating rate but you will probably have noticed that they have not made any announcements as to whether they have also extended the interest rate swaps. I am assuming that this means that they have not. In which case, the company is exposed to rising interest rates once the original swaps mature in 2017. If I am wrong, then that would be good news....

If you are aware, you should say so in the original reply before pontificating on it.

Anyway, they are likely to hedge this as well. And obviously you have not read the statement still because the last sentence of the same para says "The refinancing is subject to customary closing conditions". In other words, the announcement is fresh off the press not even legally bound yet. They'd have to wait for the closing before trying to engage in a hedge. A hedge costs nothing by the way so I expect them to do this once they close.

[buffetlunch]

Thanks for your comments both.

There seems to be some miscommunication over what is happening in 2017.

APTT refinanced its obligations in Feb 2015 for a new 7 year loan (the "New Loan") on materially similar terms, subject to customary closing conditions, etc.

2017 is significant because, under the terms of the New Loan, no significant principal payments (I believe less than 1% of the principal) are due until then.

It is easy to get confused and one person asked at the FY14 results presentation why we are talking about 2017 when the New Loan has a 7 year maturity. Hope this clarifies.

BTW, for the reasons I have mentioned earlier, I have taken profit on my entire position in APTT (about 27% profit including dividends after holding for about 1 year).

[tanjm]

It's your money, but don't confuse people. Dividends are paid out of free cash flow from operations less interest, taxes and expenses. This is similar to REITs and other business trusts. There's nothing special in this sense about APTT and only Rickmers Maritime (for good reason) pays a higher dividend yield.

There is, of course, no free lunch. The higher dividend takes into account the need to rebuild capital later down the road.