Asian Pay Television Trust (APTT), the first listed business trust in Asia which focuses on pay-TV businesses, was listed on the Singapore Exchange on 29 May 2013 with an initial public offer (IPO) price of $0.97. Fast-forward to today its share price had actually slid more than half to $0.39 as of 9 January 2017.

While APTT’s management has reaffirmed its distribution guidance of at least $0.01625 per unit for 4Q16 in its latest 3Q16 report, this would mean APTT having a total distribution payout of between $0.065 and $0.07 for FY16. Assuming a payout at the lower end of the estimated range at $0.065, APTT’s current share price still offers an astonishing 16.7 percent dividend yield. Is this a cheap bargain or a yield trap in disguise?

About APTT

APTT has an investment mandate to acquire controlling interests and to own, operate and maintain mature, cash generative pay-TV and broadband businesses in Taiwan, Hong Kong, Japan and Singapore. Its current portfolio comprises of a sole investment, Taiwan Broadband Communications Group (TBC), a leading provider of pay-TV and broadband services in Taiwan, owning the cable network in five franchise areas that pass over 1.1 million homes. Through this network TBC delivers services to its customers classified into three business segments, namely basic cable TV, premium digital cable TV as well as high-speed broadband services.

Unsustainable Dividend Payout

The Taiwanese Legislative Yuan approved a package of Cable Law amendments which became effective on 8 January 2016. The key impact to TBC is the requirement to switch-off analogue broadcasting and to deploy digital set-top boxes to all of its franchise areas as a condition for the renewal of its operating licences, scheduled for review in 2017-18. Coupled with TBC’s expansion into the greater Taichung region, these key developments will correspondingly lead to escalated capital expenditure in the coming years.

APTT adopts a distribution policy in which it intends to distribute 100 percent of its distributable free cash flow to unitholders on a quarterly basis. APTT has reported positive cash flow from operating activities consistently every year. However, if we were to take capital expenditure as well as interest costs paid into consideration, the available free cash flow will not be sufficient to cover the distribution to unitholders. This implies that the distribution to unitholders had to be funded by debts or available cash. Meanwhile, tracing APTT’s balance sheet a couple of years back would reveal that the available cash in its balance sheet was mostly attributable to proceeds from its IPO rather than from retained earnings from its business operations. This could be a cause for concern for APTT’s distribution sustainability, if it is simply paying out distribution from its offering proceeds rather than from its continuous business cash flow.

We noted that APTT’s distribution to unitholders is always greater than its reported net profit, resulting in a payout ratio of more than 100 percent every year. The unsustainable distribution could already be reflected in its declining distribution per unit (DPU) over the years. Assuming a FY16 DPU at the high side of $0.07, it is still a 15 percent drop from FY15’s DPU of $0.0825.

In view of the unusually high distribution payout ratio out of net profit and free cash flow, APTT’s distribution is unlikely to be sustainable over the long run.

Source: Company Annual Reports

Source: Company Annual Reports

Deteriorating Earnings Quality

Despite total number of subscribers for TBC’s business segments increasing over the years, the average revenue per user (ARPU) has been contracting instead. Management has explained that the lower ARPU was due to promotions and discounted bundled packages that were offered to generate new subscriptions and to retain existing subscribers. In other words, TBC is trying to increase or to maintain its market share by offering lower prices for its products and services, thereby sacrificing its profit margin in the process. This does not speak well of APTT’s earnings quality, especially if the increase in subscribers does not translate to higher overall revenue. In APTT’s 9M16 report, it reported a 4.6 percent and 5.9 percent drop in its total revenue and earnings before interest, tax, depreciation and amortization (EBITDA) respectively. Hence, we view APTT’s deteriorating earnings quality as another unfavourable factor for its distribution’s sustainability.

Source: Company Annual Reports

Source: Company Annual Reports

Conclusion

With a net asset value per unit of $0.84 as of 30 September 2016, current market price of $0.39 values APTT at a price-to-book ratio of 0.46 times. This might seem very attractive at first glance, but one needs to take note that due to the business nature of APTT, intangible assets comprising cable TV licences, software, programming rights and goodwill accounts for 87.3 percent of its total assets. In fact, APTT will have a negative net tangible asset value per unit if one were to consider only the physical assets.

As such, investors attracted by the seemingly high dividend yield should have a complete understanding of the key risks involved, before taking another step forward. For now, we prefer to remain on the sidelines while looking out for more clarity on APTT’s earnings and cash flow.