Asian Pay TV Trust Meltdown- Is It A Good Buy At Current Price And Is It A Good Business?

Asian Pay TV Trust (APTT) unit price plummeted this week upon the announcement by their management team that they will be cutting dividends by 80%. This was a rude shock to many of their investors who were anticipating the dividend to be cut by half only. As a result, the unit price had a meltdown and dropped to S$0.15 during an all-time low on 14 November 2018 from the previous day closing price of S$0.315. Obviously, a lot of dividend yield-seeking investors are cursing and swearing at APTT. I also know of a case of an investor who bought 100,000 shares of APTT at around $0.47 a few months back and in total held over 300,000 shares of APTT. This represented a loss of at least S$100K in the capital value of the stocks on hand due to higher acquisition price over the prior years.

Why Do Some Investors Use Net Asset Per Unit To State That APTT Is Undervalued hence keep buying non-stop?
I would also like to add on that using purely Net Asset per unit to value APTT is not a good yardstick which some investors had relied on. This is because a huge chunk of the "asset" is tied up with an intangible asset in the form of a license to operate its business in Taiwan. The valuation of an intangible asset is fraught with lots of subjectivity depending on your beliefs. For my own sensitivity analysis, I would have impaired and discounted it severely based on the ever-weakening future cash flow generation from the entire business.

Is The Worst Over For APTT?

The million dollar question that everyone keeps asking now is whether the worst is over. Most importantly, is it a good time to buy undervalued units for APTT and also whether it is still a good business to invest in?

First and foremost, my personal view is that APTT has been massively oversold. There are no significant changes in the current business environment. The results show 9mths ended 30 September 2018 revenue declining by <6.3%> and EBITDA decreasing by <6%> whereas unit prices had plunged by 50%.  I think that the fair value should be a lot higher. Also, the dividend payout after the cut is actually more sustainable. For those who dare goes in now will definitely have a higher probability of making profits. Generally, it is the entry price relative to the fair value of any type of business that determines whether the investment will turn out to be profitable.

Also, the extremely low price is actually making it an attractive offer for buy-out by existing shareholders such as Terry Gou (Hon Hai Group Chairman) or other big corporations. 

BUT personally, I need to point out that while the unit prices are currently undervalued, there are unstable elements that are shaking the fundamentals of APTT and one may not be able to sleep well at night holding on to this counter.

3 Reasons Why Low Risk Tolerance Investor Should Stay FAR Far Away From APTT:

(1) Intense Competition from Pirates and Mobile unlimited Data Plans from Taiwanese Telecoms.
Consumers today are buying lots of TV boxes with free pirated TV shows. OTT such as Netflix, Viu, Youtube Premium etc are rising in popularity. Pay TV services is a declining market. For fibre broadband, they are also facing intense competition from Taiwanese Telecom companies which are offering unlimited Data Plans on the mobile network for connection. While the services are not obsolete, the revenue APTT can generate will continue to decline gradually due to a change in consumer demand. 

(2) APTT Management Team is either exhibiting excessive optimism from previously announced results or they are unsure of their own business and industry outlook. 

I have previously pointed out in my other posts that the management keeps repeating that the ARPU decline is stabilizing. Apparently, their perception and definition of stabilization are very different from my own definition. Quarter by quarter it has been declining. I do not see anything stabilising about that aspect. 

Extract from previous QFY2018 Q2 Results Presentation

In addition, during the 2nd quarter announcement, the APTT management team mentioned that they believed the unit prices are undervalued and that they are contemplating a share-buy back. But for the recent 3rd quarter announcement, it turns out that they have cashflow issue to fund future CAPEX without incurring more debts. Hence why talk about share-buy back when they do not even have sufficient funds to maintain the previous dividends and future CAPEX? I personally find such presentation contradictory to the ground situation and have sold off all my APTT units immediately after my last post in September'18 and hence was lucky to have avoided the recent crash in the unit price.

I hope that the major institutional investors will demand for at least 1 new senior management personnel to join the current APTT management team. It is time to do a global search or look in Taiwan for someone who can effect change by bringing in new perspective to the current business. Look at Starhub Singapore, it has done well with a new CEO who has brilliantly executed a cost-cutting exercise and a joint venture for cybersecurity.

I hold a view that a solid management team is a core to sustaining and developing a business and to continue to make it relevant.

(3) Massive Debts and Rising Interest Rate Environment

S$1.4 billion debt is actually a high risk to APTT as alluded to Reason 1 above. The old perception by everybody that APTT is a defensive stock and has stable cashfllow is actually no longer valid due to the declining customer demand. Banks are known to be fair weather friends. Once the marco economic environment sours or there are further decline in operating results that lead to banker's re-assessment, there is no guarantee in the loan agreements that the bankers are obligated to continue extending the borrowings indefinitely. The billion dollar debt is not a small amount.

I am also not confident that APTT will be able to get a lower financing charge upon renewal in the face of a rising interest environment and also declining business albeit gradually, that leads to worsening risk profile. Again, I do not share the same excessive optimism of the management team of APTT. Leverage is always a double-edged sword that cuts both ways.

Parting Thoughts

The current price of S$0.167 per unit includes dividend declared. Stripped off the Q3 dividend of S$0.016 per unit and ex-dividend effect will be S$ 0.151 per unit. From the revised dividends projection of S$0.012 per unit for FY2019 and FY2020, the dividend yield thus becomes 7.95% which is fairly decent as historical excessive dividends payout will be re-deployed back into the business as CAPEX investment.

For more conservative and low-risk tolerance investors, it may be better to give APTT a miss in order to sleep better at night.  

Singtel 1st Half 2018 Results Review And Interim Dividends Payout (6.8cents per share)

Singtel just announced its first-half results ended 30 September 2018. I actually think that it is a fairly good results being announced considering the intense competition faced by its overseas associate companies and Optus. Operating revenue surprisingly remained resilient and even grow 3% to S$8.4 billion. Margin eroded by over 21% (after normalisation from one-off gain from disposal of Netlink Trust in the previous year) mainly due to lower contributions from Airtel and Telkomsel as well as foreign currency translation losses from the effects of stronger Sing dollars against other currencies.

The only concern I have is that Singtel still has not stemmed the bleeding from Group Digital Life business. It continued with  a widening of losses of <S$84Mil> based on the first half results. While I understand the importance of investing in this business segment which management seems to believe that there are perceived synergy to exploit on the Group's service offerings, the results have been depressing for years. They just can't seem to breakeven despite growth in revenue.

I have previously disposed all my Singtel stocks at prices of S$3.78 level as I do not like the intense competition with TPG jumping into the Singapore market by year-end. With the sharp decline in the prices of Singtel and which I think have been oversold, I have been accumulating new Singtel shares at prices ranging from S$3.060 to S$3.180 recently. The current business model from telecom business is still relevant and Singtel has proven to be defensive in nature over these past few months with lesser trading volatility relative to other blue chips. 

An interim dividend of S$0.068 per share has been declared which represented a 2.19% yield based on the last traded price of S$3.10 per share and in line with expectation. Hence Singtel is still on track for its dividend guidance over the next 2 years of S$0.175 per share. This represents an annual yield of 5.65% which is fairly attractive while waiting for the share price to recover.  

Risk of Higher Interest Rates Effect On Stocks and Properties Amidst Trade War Between US And China

The stock market has been going on a see-saw ride for many months now. Just a few days ago, stock market worldwide rallied thinking that Trump will end the standoff in trade spat with China. But then on Monday, Asian markets tumbled immediately after White House economic advisor Larry Kudlow gave a clarification that the US is not likely to deal. 

In view of the great uncertainty over the resolution of the ongoing trade row, economic activities will continue to slow down albeit the full impact not being felt in Singapore yet. We remain in a perilous situation. The relentless increase in interest rates by the Federal Reserve certainly does not help the current economies.

On the stock market front, it is a fallacy to think that banks will definitely benefit from a higher interest rate and that it is a good time to buy into banking stocks. Banks may not benefit at all from interest rates rise if the volume of transactions goes down drastically, in particular in an economic recession climate. All economies and companies follow the rule of going through ups and downs. Banks such as DBS and OCBC cannot be delivering gravity-defying higher and higher record profits for every quarter.

On the Singapore property market front, an increase in interest rates in the face of ever-increasing property prices may eventually lead to a decline soon. This is because once cheap money is removed and new buyers take up more expensive property loans, they will have to fork out a lot more in terms of monthly repayment. The below illustrative (using the recent hottest property on the block-Woodleigh Residences) depicts the effects of the monthly housing loan repayment based on varying interest rates over 30 years for those who dare to venture into the private property market at this point in time.

The Hong Kong market has already been seeing signs of a housing downturn amidst the rising interest rates. Application for mortgage applications have dropped and increasing properties being let go at lower asking prices. A similar fate awaits the Singapore property market if things do not improve soon. 

For investors, this represents an extremely rare opportunity to get stocks and properties at a good deal. The moral of the story is to wait for economic events to unfurl. Recession or not, I have learned a good lesson from the 2008 global financial crisis, that is, do not go into the market immediately. Be patient and spread out available cash and accumulate assets gradually over the coming 6 mths instead of pumping all available resources into the market at this juncture as if there is no tomorrow for fear of missing the boat.