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Gobbling APTT as its unit price plunged 50%.

Wednesday, November 14, 2018

APTT's unit price plunged by about 50% today, closing at 16 cents a unit.

Mr. Market was probably shocked by APTT's massive reduction in DPU to 1.2 cents a year.

I was surprised by the decision too.

However, I also applaud APTT for having the courage (and wisdom) to make such a drastic move.






Two years ago, I reiterated that APTT's 6.5 cents DPU was unsustainable.

I also said that a more sustainable DPU was around 4.0 cents.


In my blog on APTT last month, I shaved 10% off this 4.0 cents DPU to take into consideration the rising interest rate environment.






Then, I said that unit holders could see a lower DPU at 3.6 cents in future.

Of course, it was all speculative since I could not be expected to speak for APTT.

However, I thought a DPU of 3.6c was a pretty reasonable estimate.


On hindsight, that haircut should have been more in line with what would be required for BMT instead.







With future DPU now officially at 1.2 cents, distribution yield for my nibble is now a tad lower than 4% (instead of the expected 10.5%).

What to do?

Panic and dump?

Of course not.

I bought more today.

This time, I did not nibble.

I took a big bite.

Why?






Now, with the decision to reduce DPU to a third of what I estimated to be more realistic, APTT is going to have internal resources to manage its debt.

APTT would not only have some breathing room.

APTT would have quite a bit of outdoor space too.

If well managed and I am reasonably sure it would be, APTT's reliance on debt to continue as a business would eventually become a thing of the past (before it becomes a thing of the past itself).






At a unit price of 16 cents, we are looking at a prospective distribution yield of 7.5%.

7.5% is still a relatively high distribution yield.

I would even say that APTT is more attractive an investment now although the yield is not as high as before.

I will explain why I say this.










Basically, we have to bear in mind that this relatively high yield is going to be achieved based on APTT paying out only a fraction of its earnings.

This is unlike what happened in the past when APTT distributed much more than its earnings to investors.

Give this a moment to sink in and the picture should look better than it did before (despite the lower distribution yield).


Simply focusing on the reduced DPU would miss the big picture.






The big plunge in APTT's unit price today might signal Mr. Market's disappointment but I have actually become more optimistic about APTT as an investment with the massive reduction in DPU.

Still offering a relatively high yield based on an absolutely more sustainable payout ratio, as an investment for income, the risk of APTT imploding has reduced tremendously if not utterly dissipated.

Everything else being equal, any worsening of Mr. Market's depression would only be a buying opportunity for me.






Related post:
3Q 2018 passive income: APTT.

38 comments:

tong said...

so you sold first reit to bur aptt?

AK71 said...

Hi tong,

Not really, no. ;p

The Boy Who Procrastinates said...

Hey AK,

I guess although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go.

Not an easy task to react rationally in such situation.

Ivan said...

Hi AK, thank you for sharing this post.

"At a unit price of 16 cents, we are looking at a prospective distribution yield of 7.5%."

How did you derive 7.5%?
Thank you

HumbleBlogger said...

Hi AK

Do you mind sharing why you would take a big bite out of APTT instead of other high yielding REITs?

http://investmentmoats.com/DividendScreener/DividendScreener.php

Such as Cache or Soilbuild, according to the dividend screener at InvestmentMoats.

AK71 said...

Hi Boy,

I like to think that all investments are good at the right price. :)

AK71 said...

Hi Ivan,

The answer is in the blog.

You might want to read the blog again and pay attention to the numbers. ;)

AK71 said...

Hi HumbleBlogger,

When we look at yield, we have to ask how is it achieved?

REITs distribute, usually, all their operating cash flow to investors which is more often than not more than their earnings.

Now, this is not necessarily a bad thing but it does mean that when there is a cash crunch, they could be in trouble.

APTT was in such a situation too.

Things have changed.

Now, APTT is offering a relatively high yield by paying only a fraction of its earnings to shareholders.

So, APTT seems like a more attractive investment for income now compared to, for example, Soilbuild REIT which you said is recommended by Investment Moats.

I sold all my investment in Soilbuild REIT some time ago:
Was Soilbuild REIT a shabby investment?

Of course, I could be wrong. ;)

AK71 said...

A message from a fellow blogger:

Sorry cant leave a message on your blog. I am not sure why.

I bought yesterday too, althought not at the day low of 15cents.

Many was puzzled with my decision, and I see 4.8 cents a more manageable distribution.

(AK says: I think he means APTT could even manage 4.8 cents DPU a year.)

Assume Capex to be 80 mio, and EBITD to contunue to be in The 150 to 160 range. They just about made it.

Hope broadband be Tye driver Going forward and offset The slow dying of TV.

And they have no problem renewing all The TV licenses over The next 1_2 years without big increase in cost.

Someone ask me why not cut loss. I say its already too late anyway.

I dun think it will collapse within 3 years.

So I think I have good chance for dividend and capital gain.

Sorry to dusturb. Hahaha

Chula S. said...

Hi AK

Is now a good time to buy or wait till after Ex date? since the Q3 divident is still at 1.625c i guess price will drop even further.

Thank you.

Ivan said...

Hi AK, thanks, now I understand.
Stupid of me to ask you that question, before I attempted to calculate it first.

Laurence said...

Wah, AK show-hand in APTT.
QAF has been crashing to new all-time lows. Maybe AK sold QAF to buy.
;)

Laurence said...

Wow, this APTT blog has been hijacked to the InvestingNote Forum and is now the talk of the town there. With more than 100 comments and rising by the second!

Might even have made it to the HWZ Forum. Maybe even to China and Malaysian forums as well as happened in the past.
Congrats! AK is as famous as WB.
;)

AK71 said...

Hi Chula,

I bought but I don't know if it is a good time to buy. ;)

AK71 said...

Hi Ivan,

I see you did some numbers crunching.

Good on you. :D

AK71 said...

Hi Laurence,

I didn't show hand.

I just bought more.

As for QAF, I haven't done anything to my investment.

Another reader messaged me in FB to say that HWZ is also talking about AK and APTT now.

Not looking for fame.

Don't need it.

人怕出名猪怕肥.

tong said...

will there be a concentration risk of stock by substantial allocation on appt? black swan event can be engineered easily by big boys of appt

Brian said...

Hi AK71

To be frank I have 200000 shares bought more than 40 cents on average as most of my capital if not all are inside? What should I do? Am really afraid! Please help!

AK71 said...

Hi tong and Brian,

Top brass from Hon Hai (Foxconn) are running APTT now and there are good reasons why they are doing what they are doing.

What they are doing now will ensure APTT will continue to be a viable business in the future.

Having said this, although I feel that it is undervalued now, APTT is one of my smaller investments as there is still a rather strong speculative flavor.

I would not throw in everything including the kitchen sink even at the current price.

AK71 said...

Hi Brian,

I would not have bought APTT at 40+ cents.

In fact, after buying at 38c two years ago, I sold at 49.5c.

It was a price I would not have bought at.

Now, you have to ask yourself if you did not buy APTT at 40+ cents, would you buy now?

If you would buy now, why sell now?

Buy at prices you won't sell at and sell at prices you won't buy at.

You have the answer.

AK71 said...

See:
Missed selling APTT at a higher price.

AK71 said...

Kok Koon says...

Chim.

Easy to read.

Take a while to understand.

A lifetime to master.

AK71 said...

CH CH Ng says...

Well for me I will hold for dear life for awhile if u bough in the range of .16 to .17. At a div of 7 to 8%.

There is going to be lots of buffer for them after the div cut.

I think it is rather undervalued for now.

If price falls to .14 to .15. I will buy more.... haha..

AK71 said...

CH CH Ng says...
Forgot to say lots of selling going on..... and i like to buy when people are dumping a pretty undervalue price stock which might turn in my favour in years to come


AK says...
Lots of shorting and shorts have to be covered eventually. ;)

Brian said...

Hi AK so you mean Asia TV pay share price will go up in the near future?

Ben said...

Hi AK,

It's up to the individual's preference to buy or sell the shares. There is no right or wrong answer. People decide, Fate disposes. This is how the mechanism works.

To each of their own.

Ben

Derek Ang said...

Not quite bullish about the prospects and future of cable tv market. What make you guys decided to dive in?

tong said...
This comment has been removed by the author.
AK71 said...

Hi Brian,

I cannot predict the movement of APTT's unit price.

AK71 said...

Hi Ben,

For sure, do whatever gives us peace of mind.

AK71 said...

Hi Derek,

Diving in sounds so risky.

I am merely taking a dip.

If you have been following my blog, you will notice that I am not averse to having more speculative positions.

With top brass of Hon Hai in the driver's seat, I am willing to give APTT a few years to deliver on its plans.

I am quite happy to be paid while I wait.

AK71 said...

Hi tong,

For sure, we can learn from history but we should not be held hostage by history.

Wilson said...

My two cents is that there is considerable risk with this company.
Firstly, it seems that their capex expenditure is at least partly to sustain business competitiveness and not purely discretionary. This is why their dividend was not sustainable in the past. i.e. ops cash inflow less interest expense less capex < distributions paid. To maintain distributions they had to keep borrowing as seen by the increasing debt.
Furthermore, most of their assets are held in cable tv licences and are not depreciated. How much are these really worth?
With the cut in dividend, they MAY be able to pare down their debt over time to a more sustainable level, but at a slow pace. About 8 years to cut debt from $1.4b to $1b based on 9M2018 performance.

If interest rates do rise as expected, finance cost will pick up and reduce cash available to pay down the debt.
If revenue and profits continue to decline as per historical trend, ops cash flow will fall further. (APTT have themselves forewarned a challenging operating environment in their outlook.)
On the flip side, business could pick up e.g. competition tapers down, or broadband business picks up, or piracy issues get better enforcement in Taiwan.

Overall, the risk factors appear to be too many and serious even for a 7.5% yield.

AK71 said...

Hi Wilson,

Valid points.

Thank you for the contribution. :)

AK71 said...

APTT refinanced its existing onshore facilities and extended maturity date of offshore facilities till July 2021.

Onshore facilities interest margin reduced from 2.3% to 1.6%.

Interest rate swaps to be gradually entered into until 90% to 95% of outstanding borrowings are hedged. Currently, this stands at over 80%.

Lower DPU enables all CAPEX to be internally funded and some debt repayment.

Gearing ratio to gradually decline from 2019.

AK71 said...

Reader says...
after this news this morning alot of buying vol for APTT lol.
lucky got attend your talk, i took a very small position at 0.162 hahahaa

https://www.businesstimes.com.sg/companies-markets/aptt-refinances-debts-lowers-distributions-to-cut-costs

MT said...

Hi AK,

Would like to understand... REITs in Singapore have to distribute 90% of their earnigns back to investors. But if this REIT is cutting its DPU and keeping more earnings to itself, how does it satisfy the 90% rule then?

On a side note about APTT... I think it is owning businesses with multiple headwinds in an industry being increasingly disrupted, but it is not innovating. The ARPU has fallen steadily over the years in all aspects (cable TV, broadband), showing they are earning less per user. This would continue to depress the top line and therefore bottom line, making it harder to repay their debts even by 2021 (just 2 years away btw). Net debta: EBITA sits at 7. If anything, it is a fair business at a wonderful price. If its revenue continue to slide as its market share gets taken away (quite possible here), then you will see the share price fall accordingly.

Good luck to all

AK71 said...

Hi MT,

REITs distribute from cash flow and not from earnings which is why we see REITs distributing more than their earnings to investors.

APTT is not a REIT. It is a business trust and not bound by the same requirements.

With a big cut in DPU, APTT will only be paying a percentage of earnings to investors in future and no all its cash flow.

APTT is innovating and fibre broadband is its focus now. It will be improving its broadband offering and will be able to offering higher speed in future. Currently the speed is 500 Mbps only. It will also be able to sell excess bandwidth to telcos.

We can only hope that our facts are right and our reasoning is sound as investors. A good dose of luck doesn't hurt, of course. :)

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