APTT or Asian Pay Television, used to belong in a Macquarie Infrastructure Trust (MIIF), before they got spun out as APTT. The management is still the same Macquarie folks.
The stock IPOed in May 2013 at a IPO price of $0.97. It currently trades for $0.645.
When it IPO, the projected yield was 8.5%. Based on the current distribution of $0.08/yr, the dividend yield is 12.5%.
There is a reason I did not add this business trust to my Dividend Stock Tracker, which tracks some of the common better know dividend stocks such as blue chips, REITs and business trust. I usually wait for 1 year to add them in, and also that I know this stock is not going to be good news largely to investors. So I save you guys some pain.
That is not to say what is on the tracker are angels. Buy at wrong prices and you are in for a lot of hurt. Buy when fundamentals decline and you are in for a lot of hurt.
There are 2 reasons why its not recommended:
- The trust’s dividend yield is greater than the free cash flow generated from current operating business, including the deduction of interest expenses
- The management have shown to be continuing doing these financial engineering, and often results in declining share price and dividends
Let’s go through some lessons on dividend payout sustainability and cash flow.
The Free Cash Flow
If you would like to invest for dividends, you have to at least know how to check the sustainability of dividends.
By that we meant that the cash flow needs to cover the dividend payment.
Here is APTT’s past dividend declaration:
Half Yearly Distributions
- 30 Jun 2013: 4.8 cents
- 31 Dec 2013: 4.13 cents
- 30 Jun 2014: 4.12 cents
- 30 Sep 2014: 2 cents
- 31 Dec 2014: 2.13 cents
- 31 Mar 2015: 2 cents
- 30 Jun 2015: 2 cents
- 30 Sep 2015: 2 cents
If you annualize these dividend payout, on average they require 8 cents.
APTT currently have 1436 mil shares outstanding.
If we multiply $0.08 with 1436, to pay the dividend requires $115 mil per year, or average $28.75 mil per quarter. Hold this number.
Free cash flow has a few ways of calculating, but the most comfortable for me is to take Operating Cash Flow before Working Capital Changes – Income Tax – Maintenance Capex
Above shows the quarterly cash flow statements for APTT.
On first glance the free cash flow can be derive by taking (1)-(2)-(3), with 2 being income taxes, and 3 being total capital expenditure.
Free cash flow gives you the amount after maintaining the plants and equipment that APTT can use to
- pay off debts
- repurchase shares
- payout dividends
- buy back shares
- reinvest in business for growth
Or a combination of the above.
You realize (3) is total capital expenditure. We want to factor in the maintenance part, because here we are concern with the bare minimum dollars required to keep the stuff tip top to run and generate current cash flow, not the expenditure to improve growth.
Not many business breaks it up for you nicely into maintenance and growth expenditure.
In APTT case, somewhere in their report they did mention, though i realize the numbers do not tally up with the acquisition of property, plant and equipment in the cash flow statement! Still I will use this break down over the one in the cash flow statement since it is something closer to what I want.
You will notice in the previous figure, there is a number (4) highlighted as interest and other financing cost paid. This is the interest expense paid for borrowing debts for business and rolling it over. It is an obligation for APTT to pay that, if not they will get into trouble with their creditors.
Thinking this way, under most circumstances you cannot pay out the interest portion as dividends.
So usually, to find out how much cash flow for capital allocation (that is to pay out dividends, stock buyback etc), I take free cash flow – interest expense.
With that lets take a look at APTT quarterly cash flow. I have tabulated this to make things easy.
Usually my first cut is to look at annual figures, but for APTT I am curious how the quarterly figures look, fearing the annual figures will mask something.
I have computed 2 free cash flow (FCF), one using BEFORE working capital one using operating cash flow. For some company, the figures before and after working capital can vary a fair bit, due to the nature of the business. That is not to say we should not care about that difference. That is a topic for another day.
Remember that I said to pay out the 8 cents dividend, APTT requires $28.75 mil per quarter on average? Take a look at FCF (using WC) and FCF (using OP). They are consistently less than this figure with 2 quarter close to it.
I haven’t even factor in the interest expense incurred on the debt.
If we factored that in (take a look at FCF (using WC) – Interest and Finance cost and FCF (using OP) – Interest and Finance cost) ), it shows that APTT couldn’t pay out the 12.5% dividend yield with their working operations.
How do they pay for the dividends?
With some help from debt. Observe the line Borrowings and Equity Raising. I tabulated the increase in borrowings and increase in equities per quarter there.
The borrowings have been rising.
Is borrowing to pay dividends wrong?
This is not wrong. However, when you invest, you would like to invest in something that SHOWS PRUDENCE and SUSTAINABILITY.
If your brother treats you dinner by taking on more and more credit card debt, it does not show much prudence.
Unless you know that he will increase his earnings to pay off the debt and not use it in the future.
In APTT’s case, they may be expecting their future Taichung expansion to work out. If that expansion works out, the operating cash flow will rise, and they do not have to raise more debt to pay the dividends.
Will the expansion work out? That is another rabbit hole to jump down for the interested investor.
How long can they sustain this debt funded dividend?
We can judge this by how much room they have to leverage up. There are usually 2 leverage metric that I use: Net Debt to Asset and Net Debt to EBITDA.
I place more priority to the second.
Current net debt is about $1088 bil and if we annualize an EBITDA or $49 mil, the annual EBITDA is $196 mil.
The Net Debt to EBITDA is 5.55 times.
APTT will tell you that is ok. Kyith will tell you that is ok if you amortize the debt or pay it down, or that the growth from this capital investment have a higher level of certainty.
The net debt to asset is about 42%.
In truth, they can go up to 50% so they can do this for a while more!
Conservatively, how much dividend per share can APTT pay out from current operations
If you look at the FCF – Interest Expense per quarter, the conservative figures should be around $15 mil/qtr or $60 mil/yr
This would pay out 4 cents/yr or 50% of current dividend.
So this is a no go?
That is up to you to decide. This article only shows you part of the picture. There is the qualitative business aspect of the Taiwan Broad Band and Cable TV industry that I did not go into, not to mention the expansion into Taichung.
Remember this: There is a price to pay for almost every asset with a particular intrinsic value.
If APTT was at $0.10, and the conservative cash flow can pay only $0.02 div compare to $0.08 now, that is still a 20% yield. At that stage, the tide have gone down, all the problems that you have not thought about, probably are laid bare for us to see.
The value investments are usually found where the volatility is the highest, when normal folks are shitting themselves and do not know how to compute the value or the margin of safety point to purchase.
In that stage of $0.10, you get to buy an asset with risk known. You get to assess if the risks are fixable problems or something that cannot be fix. If it is fixable, and you have a good reward in terms of yield to wait for the problem to fix, then it may be a good proposition.
My experience with MIIF and what I observe of APTT is that the share price might be in for a slow grind bleed. It is one of the most dangerous moves because the price movement is not large enough to scare you to pull out your money, but before you know it, its down a lot.
I hope that this also proves a good article to learn how to figure out the cash flow statement to get what you need to find out the dividend sustainability.
If this is still confusing, I have an exclusive article talking about Net Profit, EBITDA, Operating Cash Flow and Free Cash Flow in Dividend Investing to help you.
You may also want to read SillyInvestor’s good take on APTT.
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