Learning the Lessons from Asian Pay TV Trust (APTT) - Avoid Companies with Unsustainable Dividends

by: Tam Ging Wien

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Asian Pay TV Trust (APTT) had just released its Q3-2018 result this week and declared a DPU of 1.625c, the same amount last year. However, management guided that the DPU for year 2019 and 2020 would now be revised to 1.20c. It closed the week at $0.17 which gives it a forward yield of 7.06% in 2019.

Source: http://infopub.sgx.com/FileOpen/APTTQ32018ResultsAnnouncement.ashx?App=Announcement&FileID=533803 

APTT was listed during its IPO at a price of $0.97 way back in 2013. At the closing price of this week, it trades as a terrible -82.5% capital loss or $0.80 for every unit. That’s an average of -16.5% capital loss each year.

The total dividend paid out by APTT over the years since IPO totalled only $0.433 per unit, much lower than the capital loss of $0.80.

On a net basis, for each unit an investor had held on since IPO, they are making a net loss of $0.367.

Could investors have detected red flags within APTT before this drastic cut? What are the lessons that we can learn to ensure that the counters we invest in are able to sustain their dividends?

What Does Sustainable Dividends Look Like?

In general, we like dividend paying stocks to pay dividends that is consistantly less than its Free Cash Flow (FCF).

Cash flow is essentially the actual cash received by the company in the course of doing its business. The Operational Cash Flow is the cash left over after deducting all the operational expenses of the business and adjusted based on the working capital. The Operational Cash Flow can be found as a line item in the Cash Flow Statement.

However, there is another type of expense known as the Capital Expenditure (CAPEX). CAPEX is the amount spent by a business to acquiring or maintaining fixed assets, such as land, buildings, and equipment. To justify an expense as a CAPEX, the purpose of the expenditure must be to maintain or expand the business. This is opposed to Operational Expenditure where the purpose is to sustain the operations of the business.

Interestingly, from an accounting perspective, CAPEX does not need to be expensed immediately in the Profit & Loss Statement. Instead, it is depreciated over the useful lifetime of the investment. As an example, when a business purchases a new vehicle for goods delivery, the expenses spend to purchase the vehicle can be classified as CAPEX as the vehicle will help to expand the business. While the business may spend a large amount of cash upfront on the vehicle, its does not need to classify this as an expense. Instead it will depreciate the expense of the vehicle over the estimated time that it will be in operational service.

While this accounting treatment of CAPEX makes absolute sense, the issue is that these expense are real cash that is flowing out of the business. Hence like-for-like, with all else being constant, there would be more cash flowing out of the business when there is CAPEX compared to what we see in the Profit and Loss Statement.

In short, the Free Cash Flow (FCF) of a business is the left over cash that a business has after it has deducted both its Operational and Capital Expenditure.

Looking at APTT Q3-2018 Cash Flow Statement, we see that the 9M YTD Operating Cash Flow is $123.424mil.

The “Acquisition of property, plant and equipment” and “Acquisition of intangible assets” is $47.691mil and $8.886mil respectively. Both these expenses are CAPEX.

Therefore the difference between the 2 gives us APTT’s Free Cash Flow (FCF) for 9M-FY2018 is $66.847mil.

Comparing this to the total distribution being paid out over 9M-FY2018 which is $70.044mil, APTT is paying out more dividends than its incoming Free Cash Flow (FCF)!

Source: http://infopub.sgx.com/FileOpen/APTTSGXReport30Sep2018.ashx?App=Announcement&FileID=533805 

Was APTT’s Dividend Sustainable To Begin With?

Certainly, just one year of paying out more dividend than your Free Cash Flow doesn’t make your dividend payout unsustainable. It’s when the business continues to do this year after year that it becomes unsustainable.

So let’s take a look at APTT’s historical Operating Cash Flow, CAPEX, Free Cash Flow and compare it with its historical Dividends since IPO.

Source: REITScreener ResearchProButterfly ResearchAsian Pay TV Trust

What we found was that APTT has historically since FY2014 been consistently paying out dividends higher than its Free Cash Flow!

Where is the Money Coming From?

Since dividends need to be paid in cash, and if they are paying an unsustainably high dividend, then the money needs to be coming from somewhere. But where?

The clue lies in its Balance Sheet. Plotting this historical debts of APTT, we found that the debts have been climbing steadily.

Source: REITScreener ResearchProButterfly ResearchAsian Pay TV Trust

When we consider the Total Assets as well in the calculation of its gearing, we found that its gearing as also been steadily increasing. This means that APTT has been borrowing more and more.

Source: REITScreener ResearchProButterfly ResearchAsian Pay TV Trust

Is APTT borrowing to pay its dividend? Perhaps. Just like our past article on StarHub entitled Is StarHub Borrowing to Pay Shareholders Dividends? where we discussed StarHub paying an unsustainably high dividend, APTT was similarly doing so.

A business cannot continue to pay out cash dividends consistently and sustainably above its Free Cash Flow. Certainly, there is a limit to how much it can borrow and unless its business starts to generate more cash, sooner or later, this unsustainable dividend payout will eventually catch up with it.

Is APTT’s Business Growing to Generate More Cash?

Looking at the historical revenue trends for APTT, we think not. Revenue for all 3 of their segments are rather flat. Without growing its revenue, its only recourse to generate more cash is to cut its cost. Even that has its limits as there is only so much cost you can shave off from your business.

Source: REITScreener ResearchProButterfly ResearchAsian Pay TV Trust

Looking at its profit trend, its seems that it’s on a decline. Operating Cash Flow has also somewhat taken a dip in 9M-FY2018 compared to FY2017. With very flattish revenue trend, we are not optimistic APTT generating more cash in the coming FY2019.

Source: REITScreener ResearchProButterfly ResearchAsian Pay TV Trust

Avoiding the Painful Sting

In summary, APTT has been paying out an unsustainably high dividend above its Free Cash Flow since FY2014. Its revenue has been rather flattish and it has not been able to grow its business to generate more cash. As a result, to maintain is high dividend, it has resorted to increasing its debts which resulted in increasing its gearing each year.

Going forward as investors, we will need to monitor the Free Cash Flow vs the Distributions Paid annually. If a counter is generating negative Free Cash flow or regularly paying out Distributions above its Free Cash Flow, its certainly a red flag.

Just doing a simple check of Free Cash Flow vs Distributions Paid could save investors a lot of pain.

Is the Revised Dividend Sustainable Now?

Now that the annual dividend has been cut from 6.5c to 1.2c, is the revised dividend payout now sustainable? Is the new revised yield of 7.0% attractive?

Certainly, this is a good question and one that is worth asking.

According to the latest announcement, APTT has 1,436,800,000 units in issue. Paying 6.5c per unit would cost the company $93.392mil annually.

Revising the DPU to 1.2c per unit would now instead cost the company only $17.241mil annually. This is significantly lower than the Free Cash Flow of approximately $89mil annually. Therefore we conclude that going forward, the 1.2c DPU is likely to be sustainable in the foreseeable future.

However, there will still be risk with regards to APTT’s business. In this new age of Netflix, YouTube and other streaming video on demand players, we think that it would be difficult for traditional cable TV providers to compete. APTT’s business in our view will continue to suffer it does not continue to innovate and recreate itself in new disruptive economy.

From an investment perspective, we value dividend sustainability over high yield. We also value business that can consistently grow its revenue, profits, cash flows and distributions. We personally don’t see this growth potential from APTT in the near future. Therefore, we will be staying away from APTT.

Going forward, it would be interesting to relook at APTT 1 year from now to see how its business is performing.

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