Asian Pay TV Trust keeps spiralling downwards after Q1 2018 results. How low could it go?

Asian Pay TV Trust ("APTT") closed off Friday (24 May 2018) at a 52 weeks low of SGD 0.440. Based on the re-affirmed SGD 0.065 per unit of dividend guidance for FY2018 by the Management of APTT after the Q1 2018 results announcement, this represented a dividend yield of 14.77% (please see the previous post here with regard to analysis on whether the cashflow for dividend is sustainable) Is this a value trap? How low will APTT goes? When will the dumping of its units in open market stop?

Why did APTT plummet recently since the release of its Q1 2018 financial results?

I rationalised that the reasons for the free-fall are as follow: 

1. The market  getting jittery based on the continued erosion in its core business earnings amidst the competition. 

2. There is also the announced increase in corporate tax rate from 17% to 20% in Taiwan. I reckon that due to the pursue of populist policy by the government to reduce personal income tax,  the authority have no choice but to balance the books by milking corporations. This will make the government look good for the upcoming year end election. However, this is contradictory to the overall reduction in corporate tax rates going on in the world to boost business growth and also attracting foreign investments. 

3. Market interest rates are expected to keep going upwards. There is again some uncertainty by the market over the interest expenses on huge loans taken out and its financial impact on APTT. Just to add on, the interest rates on the bank loans used to be over 8.5% during the Macquarie Infrastructure days. Since then, APTT has restructured the bank loan with a drastically lowered interest rates. The interest rate is based on interbank offer rate plus 2.3%. The latest loan of NT$29 billion taken in Oct 2016 will only be due in Oct 2023. Out of these, NT$16 billion has been hedged using interest rate swaps from floating rate to a fixed rate.

4. Losses in Q1 2018. This was actually due to the one off deferred taxation charge of S$11Mil taken into the books from the increase in corporate tax rates from 17% to 20%. I have mentioned in my previous post (pls see here) that there is no cashflow impact on the application of deferred taxation in FY2018. The tax view and accounting accrual view overcomplicated the situation and may have casted an aspersion on the future financial performance on top of the worsening key business indicators in pt 1.

5. Cancellation of Korean America Summit in Singapore on 12th June 2018 by US President Donald Trump? The Business Times mentioned that Asian stocks were jittery over the uncertainty of the Summit in Singapore. 

Review of key Business Metrics of APTT

The 2 key operational metrics of APTT are namely, (i) Revenue Generating Units (RGU) and (ii) Average Revenue Per User (ARPU). In its presentation deck to shareholders, the management of APTT often put down ARPU as "stabilising".  

For example, for previous year Q1 2017, APTT reported ARPU stabilising. 

Then again in the recent Q1 2018 presentation to investors, APTT again used the term "ARPU stabilising". 

The ARPU is thus actually far from being "stable". The blood bath have not halted. ARPU is still sliding downwards almost every quarter. The Premium digital cable TV business segment is suffering from pricing challenges due to competitive pressures from the unlimited wireless data offerings from mobile operators. ARPU had lowered due to promotions and discounted bundled packages being offered to generate new RGUs and to retain existing RGUs.

The only good news is that the RGU are indeed stable and the blood letting in terms of decline financial performance is really due to unfavourable pricing that is adversely affecting their profit margin.

  

As to how serious is the declining ARPU or whether it will indeed eventually reached "stabilisation", investor will have to make up their mind on the future outlook. One will have to wait for the upcoming Q2 2018 results to have better visibility since the ARPU in Q1 2018 is still declining.  

Valuation using the Dividend Discount Model

The Dividend Discount Model is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. Since many investors seems to treat this as a high yield stock, I reasoned that the DDM will be a useful tool for us to do some mathematical valuation to see the fair value per unit expected.

P = D1 / (r -g)

P= Current Price based on summation of the infinite series;

D1= Dividend Payment per unit (S$0.065)

r= Cost of Equity (assume 14.77% based on 25th May 2018 closing price)

g= Dividend Growth Rate (assume zero in APTT's case) in perpetuity.

Based on the above, we have P = S$0.440 if the Cost of Equity is 14.77%

Now, if we assume that the Cost of Equity, based on the previous  month of around 12.26%, then P = S$0.530. The risk premium and expected return from investors have increased further ever since the release of the Q1 2018 results.

If we assume that the dividends going forward to be cut by 25% due to one's view that APTT will cut price further or lose more subscribers while maintaining 14.77% as Cost of Equity, P= S$0.35.

Hence based on one's outlook, we see that the price range can be from S$0.35 to S$0.53. Analyst target price based on the discounted cashflow projection (another valuation methodology) priced APTT at S$0.52. Based on the slowing quarterly losses in ARPU, I will say the fair value should be around S$0.40 and with probability of favourable upsides or stabilisation in view soon. Loan facility due in 2023 means that short term continuity of the business is not likely to be a major issue as the ability of the business to service its debt is not an immediate issue yet but there is a risk by assuming no major surprises in its current revenue generating abilities.

Please do share your views and outlook for APTT. Will it drop below S$0.40 or is it already oversold and represents a good opportunity right now to invest in APTT?

The increase in tax rate to 20% led to HUGE LOSSES in Q1 2018 for Asian Pay TV Trust? Myth or Fact?

With the release of Q1 results by Asian Pay TV Trust ("APTT"), I begin to see a lot of weird comments on investment forum from how they interpret the results. Some of the folks on the forum frantically advocated an immediate sell off due to the huge loss incurred for Q1 2018 by APTT. Some remarked that "Taiwan tax is so scary that it makes a profitable company into a loss making company overnight". Others were skeptical on why APTT management only focuses on EBITDA and did not place emphasis on the net losses incurred. 

Myth: The increase in tax rate to 20% led to huge losses in Q1 2018 for APTT. Taiwan tax is so scary that it makes a profitable company into a loss making company.

This is not true. The main reason for the turning of results to loss is due to a one time <S$11Mil> deferred taxation charge to the Profit and Loss statement. Note that a deferred taxation charge represents only a timing difference to smoothen out the accounting profit and loss else it will lead to a skewing of year by year financial results. There is no cashflow impact. Neither does it represents an increase in actual tax expenses to the Taiwanese Tax Authority with the one time deferred taxation charge. The effect gets reversed out over subsequent financial years and is a creature that exists due to the prescription under the International Accounting Standard.  

To better illustrate how this works, let's look at the following simplified scenario. Assuming S$100K of Computer Equipment were purchased and under tax law, it allows for accelerated tax depreciation of 100% within the first year, all S$100K will thus be eligible for tax deduction filing. 

From the accounting perspective, the Computer Equipment purchased has a useful live for 3 years. Hence the annual depreciation rate booked into the Profit and Loss statement will be S$33.3k on a straight line method. 

Next, we assume a business can generate S$150K of revenue every year and the only expenses for the purpose of this theoretical exercise is the depreciation charges for Computer Equipment. Also prevalent income tax rate let's assume is 17%.  

As you all can see, without the Deferred Tax adjustment, the current tax for the first year is only S$8,500 whereas for Yr 2 and Yr 3, the current tax expense payable to the Tax Authority increased significantly to S$25,500 respectively. This will lead to drastic differences in the Net Profit and Loss for Yr 1 relative to Yr 2 and Yr 3. It is only with this creature known as "Deferred Taxation" being created that leads to the same Profit and Loss over the years from the accounting perspective to resolve the timing differences between tax and accounting view.  

There is thus no direct cashflow impact from the application of deferred taxation. Hence one should only consider the impact of the revised increment in current taxation payable to the Taiwan Tax Authority and exclude the impact of the deferred taxation with regard to the assessment of Q1 2018 performance of APTT.

In my next post, I shall do a quick review of the Q1 2018 APTT business results as well as a valuation of the business to compare against the market unit price.  

Refinancing for Investment Property/Residential Property- 3 things to watch out for to avoid PLAY OUT by the bankers.

The servicing of the housing loan is one of the major expenditure items for most Singapore households. A properly executed refinancing can free up much needed cash-flow for savings or investments.

1. It is not enough to just keep in mind the date of the lock in period of your housing loan. The required notification period is also of paramount importance if not more essential.

One will need to read the terms and conditions of your loan contract clearly in particularly for the portion on the notice period required. Generally, it is one month notice for partial repayment and 3 months notice period for full repayment via cash repayment or refinancing from other bank. 

This is similar to an employment contract. You cannot just happily decide to resign suddenly and disappear the next day from work. Your employment contract contained a clause that states clearly your notification period to Employer before your last day of work and failing which you will need to pay compensation in the form of cash in lieu of short notice. 

1(i) What if one forgets to give notice? 

This will mean that generally, you will have to pay the standard higher interest rates compared to the special rates under lock in period. This can lead to a huge jump in interest expenses until the end of the notice period. This can range from a hundred dollars to couple of hundred dollars  per month depending on the quantum of your housing loan. DO NOT give the bank an excuse to earn that extra from you. 

Also, once saddled with the threat of higher interest, one may panic and just decided to quickly re-contract another 2 to 3 years package with the same bank without looking into the market for better packages from other banks to get the best deal.

Always set an alarm on your mobile phone or write a post slip note and stick it on your refrigerator door or home notice board 4 mths before the loan is due. Be very "KIASU" over it. We are talking about the biggest household expenditure where most of us spent decades servicing it and the savings from a well executed refinancing can save thousands of dollars in 2 years. Do not expect your banker to care about saving as much money as possible on behalf of you. Their interest is not aligned with us. 

The refinancing procedures with the new bank should ideally take place 3.5 mths to 4 mths before the last date of the locked in period. This is to give adequate lead time for yourself to study and compare various housing loan packages available and also for your new banker to get the whole bunch of documents from you and then process internally for the letter of offer. After the letter is signed off, only then will the other bank's solicitor write in on behalf to your current banker to serve notice and to commence the administrative settlement of inter-bank debt. For those who are unfortunately stuck in the paper work and could not complete this on time, please serve notice personally to the bank via a formal written notice.   

1(ii) Some housing specialist at bank branches mentioned refinancing does not need to serve notice at all as it is a different case. Only partial repayment or full repayment in cash need to serve notice. Is this statement true? What if the officer at the branch refuse to accept serving of your notice?

If the terms and conditions clearly state so, then this must be adhered to. No way out of it. If the officer does not accept, please write down in black and white and emailed them back. Yes. the officers at the bank do screw up as some of them may be new joiners and not familiar with the internal procedures. I experienced it a few times myself with such bank officers. This brings me to my next important point on documentating everything formally, which will be extremely useful during times of disputes or screw up by the banks.

2. Ensure you document down the exact communication with the Bank's Housing Specialist. This is even more so if many conversations took place over the phone. Write an email to document what had been discussed in order to protect your own rights or as evidence in the event of future dispute.

I will share one nasty experience here with one of the banks with regard to my personal housing loan taken out a few years back.

It started with me looking out to refinance my investment property and I wrote in to the Housing Specialist of the bank asking for the latest fixed rate interest loan package available as I was worried over rising interest rates (I got a phobia on this as I paid before over 4% interest expenses on my first investment property and the monthly servicing of interest expense was just crazy). 

The bank officer replied and listed down the packages. I looked at them and wrote back in black and white to say that I want a "fixed" interest rate package. The officer then recommend the package to me and then send the revised loan contract with a new 2 years locked in period for my signing off. 

Strange thing is that after 10 months, I noticed that my monthly installment payment are not similar and is in fact creeping upwards. I was devastated and realised that I have been mis-sold on my loan package. I quickly called up the bank and explained the situation. However, the reply I got back from the bank was chilling. If I had disagreed on the package on offer, why did I sign off on it without reading through in detail? As far as the bank is concerned, the contract is legally binding. Now, the contract has many clauses which are just too technical for me to understand and I have mainly relied on the email instruction to convey on what I wanted over for the loan package. Never would I imagine such a screw up by the bank officer to occur which led to the predicament I found myself into. The bank officer kept insisting the package was fixed rate. Later I found out that his definition of "fixed" for him is referring to a stable benchmark rate that based on historical trend, should not increase much overtime.

Given the unjust incident, I went back to my email account and dug out the email correspondences and wrote in to complain the unfair handling of my case. All the while, I was praying that I have not deleted them. Luckily for me, I managed to retrieve the emails albeit spending a few hours on it. The bank then re-looked into it and then mentioned that "out of goodwill" (since I can produce the supporting correspondences), they will let me re-finance to the prevalent fixed interest rate package which was at an all time high of 2.38% compared to the initial point in time 10 mths back, without penalties. However, they required me to re-lock in another 2 years from the point of the new package on offer. I had no choice but to accede to their condition as I was at their mercy. I simply did not have the financial resources to mount a lawsuit over this case of mis-selling by the bank which had plenty of financial muscle to bulldoze over me. 

Hence the importance of the email documentation in terms of black and white. Of course, the other main take away from this is that besides the formal email correspondences to be filed, one must not take things for granted during signing off on the loan agreement and to press for details on any part that one does not understand or do not have adequate comfort.

3. Re-financing to lower interest rates may not be always worth it. There are upfront legal fees (S$2K to S$3K) and valuation fees (around S$500).  Also be THICK-SKINNED and asked for freebies.

For example, if the new desired loan package chosen is 2 years and lowered interest expenses by only S$100 per month, this will allow you to save a mere S$2.4K over 2 years relative to the best offered loan package from your current bank, then the total additional cost of S$2.5K for legal fees and valuation fees plus the time spent to go through all the hassle will simply not be worth it. 

Also, be thick skinned...ask for shopping vouchers, legal fee rebate, or free home fire insurance. You never know how much extra you can squeeze out of the banks or their sales agent. Banks are making lots of money out of the interest expenses that you are servicing. Any such "freebies" will be peanuts to them.

Summarising, I seems to be always unlucky in terms of having unpleasant and strange encounters financially with banks and also insurance companies (Pls see "My Struggle with Insurance Policies" post here). I can only say that growing older does make one wiser. Also, thanks to the Invest Bloggers Community, the online readings have certainly shorten the steep learning curve in terms of my personal financial management.

Netlink NBN Trust- Boring but Stable

Now, this is an extremely boring counter that I observed having a low volatility with the price range hovering around S$0.815 for a very long time. Since IPO, its highest price was only S$0.845 and lowest point at S$0.805. I actually sold off all my Singtel stocks and invested in Netlink Trust a few months back for the relatively easy to understand business model which is tightly regulated by the Singapore government. 

Its key business activities as per below from its Q4 results announcement:

  

Initially when I was reading the announcement, I nearly had a heart attack (8% of my overall portfolio was vested in this one)  when I saw the revenue dropped unfavourably against the forecasted revenue during IPO. Luckily, Netlink was able to lower its operating costs more than the decline in revenue. Hence its net profit was actually lifted higher than forecasted, meaning that it performed better than expected. Consequently, 3.24 cents of final dividends per unit was declared which seems to be 5% above market expectation. This translates to a dividend yield of 5.7%. 

Also, during IPO, it was forecasted that for year ending 31 March 2019, dividend yield based on S$0.81 was to increase by 0.3% (5.43% to 5.73%) relative to year ending 31 March 2018. There is thus a strong likelihood that the forecasted improvement in business will lead to an eventual 6% dividend yield. 

So yes....boring counter but A+++ for regulated business and potential gain from future entry of TPG Telecom which will probably be leveraging on Netlink Trust infrastructure. 

Sleeping Dragon to be AWAKEN soon! (Perennial Real Estate Holdings Limited)

Beijing Tongzhou Integrated Development

The Q1 2018 results announced by Perennial Real Estate Holdings Limited ("PREHL") are promising after normalizing for the divestment of 20.2% of TripleOne Somerset. The revenue in fact grew by 10.1%  relative to Q1 2017 mainly due to contributions from Perennial Qingyang Mall, Chengdu if we exclude the one-off item. 

Significant upsides to Business Developments expected in current FY2018 and FY2019:

1. TripleOne Somerset- Securing anchor tenant and other major office tenant.

The new two level retail podium is expected to receive TOP by 2nd half of 2018. It has secured anchor tenant, NTUC Finest which is taking up 11,568 sqft of space.

Another tenant, Secured Space (flexible work space concept business), will occupy over 35,000sqft spanning 2 floors.

2. AXA Tower - AEI near completion and Enbloc Potential

Works on the new two-storey medical annex block, retail podium and office common areas are progressing well and have reached various stages of completion. Management also looking out for enbloc opportunities to realise value for shareholders.

3. Capitol Singapore- plans to build up recurring income in place

PREHL has successful resolved the long standing dispute with another shareholder by buying over the shares held by the other shareholder. This gives it full executive control over the future strategic direction for this prime property. Please also see my previous post with regard to Capitol Singapore here:https://dividendpassiveincome.blogspot.sg/2018/04/perennial-real-estate-investment-trust.html

The management is currently finalizing the appointment of the operator for the hotel component from a shortlisted group of established and renowned five-star brands/operators. This will be an important building block in bringing in essential recurring income for PREHL.

4. Opening of Perennial International Health and Medical Hub in Chengdu.

This is expected to start contributing to PREHL overall results from 1st June 2018 onwards. Committed occupancy for the Medical Hub is currently at 87.6%. In terms of financial perspective, this means that Q3 2018 and Q4 2018 will be higher than previous year of 2017 from additional realisation of their investment in Chengdu China. For next year, of 2019 the Medical Hub will contribute to a full year of financial which will be another year of quick growth for PREHL.

Bird's Eye View of the Integrated Healthcare Concept in Chengdu

Net asset per share value is currently at S$1.692 per share. Its market valuation is still at only S$0.865. This represents a huge 51.1% discount due to the market perception of high risk in its China ventures. 

With the upcoming realization of returns from China and local development projects from current year to FY2021, the risk of non-performing projects are diminishing and the huge risk premium associated with PREHL should go down eventually by 2020 assuming no macro economic turmoil. Growth and recurring income building strategies are well on track under the excellent leadership of the current management team.  

How safe is it to invest into Crowdfunding Firms? Does the return justify the risk?

The recent fraud case whereby an interior design firm produced fake invoices to a Crowdfunding platform has placed the spotlight on it. It seems that the risk of losing one's capital is high despite screening measures by the platform offering the linkup between business and retail investors. 

What is Crowdfunding?

Crowdfunding is the use of internet by entrepreneurs to tap onto retail investors for funding of their businesses. Some of these businesses get turned down by the commercial banking institutions but now have an opportunity to to appeal directly to retail investors. 

This is a big step forward for both businesses and retail investors. Previously, only large entities or individuals with extremely deep pockets can reap the benefits of investing in new business start up. 

Crowdfunding can take on various forms, namely:

1. Equity crowdfunding- raising of funds through project basis; 

2. Debt crowdfunding-assignment of unpaid invoices by customers directly to retail investors to receive cash upfront while paying an interest to investors.

3. Donation crowdfunding- people put in money because of altruistic reasons and do not expect any returns.

In the recent Singapore case, this involves debt crowdfunding akin to factoring to banks. For this case, the retail investors will provide the funds upfront to the business in return for assignment of debts as a pledge and also an annualised ""interest" .

More details on the background:

Capital Springboard ("CS") arranged factoring of debts by SMEs to investors on its platform discovered a fraud by one of the companies. Vanguard Project Management (an interior design firm). It was reported that CS sold S$6.9Mil worth of fake invoices to investors.

Invoices pledged for factoring have an average duration of 90 days and accredited investors can buy them for an average annualised return of 11% to 25%. CS have a risk assessment team in place to review such debts and then give a rating from A to D to the debts on offer. 

Another intriguing aspect from this episode was that it seems that CS was not licensed or regulated by the Monetary Authority of Singapore (MAS). Not sure why this was so but apparently, such fund raising which is quite similar to the shadow banking scheme previously in China are not regulated by MAS.


Ending Summary
The crowdfunding mechanism allows retail investors to attain access to an additional form of investment vehicle to earn returns on their spare capital at very attractive annualised interest rates of 11% to 25%. However, there is no free lunch. Also, some of these investments are not protected by MAS. 

Retail investors must be mindful to do their own due diligence when deploying capital and not be distracted solely by the seemingly high returns on these crowdfunding platforms.

SPH REIT acquiring The Rail Mail at Upper Bukit Timah Road for S$63.24M- First acquisition after IPO for almost 5 years

SPH REIT management has finally announced their first maiden acquisition post its IPO in mid-2013. The Management had previously mentioned that they had been aggressively and actively looking at acquisition of different properties but were having challenges finding yield accretion ones. 

It sure took a long time before the Management team of SPH REIT finally found a property that their team assessed to be a yield accretive investment. I was thus very surprised to find out that they had made an announcement on 30 April 2018 (Monday) after market trading hours and slightly after 8pm with regard to SPH acquisition of The Rail Mall. 

Extracted from SPH REIT SGX Announcement

The Rail Mall is a retail strip, with a 360-metre prominent road frontage to Upper Bukit Timah Road, comprising 43 single-storey shop units and 95 private carpark lots. One of the key access points to the Rail Corridor is located within a short walking distance from The Rail Mall. 

The Rail Mall has a total net lettable area of approximately 50,000 square feet. It is well served by the Hillview MRT station about 250 metres away and a network of public bus services. Accessibility is further enhanced by its proximity to the Bukit Timah Expressway (BKE) and Pan Island Expressway (PIE). 

The expected completion date of this acquisition will be on 28 June 2018.

The only thing which i do not like is that The Rail Mall lease ends on 17 March 2046. This is a very old leasehold property. Only another 29 years of the 99 yrs leasehold remain for the lease tenure. I also trust that the management team has budgeted in sufficient maintenance expenses for the aged property.

Despite being only a minor acquisition exercise at only S$63.24Mil, this does help build up the M&A exposure for the SPH REIT management team. I am glad that this new property will add value to shareholders and is definitely the right step forward for SPH REIT. May the Seletar Mall and other acquisitions also come along for SPH REIT to continue growing.