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SINGAPORE (Dec 11): Asian Pay Television Trust has reaffirmed guidance that it will pay out 6.5 cents a unit for FY2017 and FY2018. With its units trading at 60 cents on Dec 5, APTT currently offers a yield of 10.8%.

APTT reaffirmed its guidance when it reported its 3QFY2017 results, and said that it was based on the performance of its sole asset, Taiwan Broadband Communications Co (TBC). APTT also said that it would distribute 1.625 cents a unit for 3QFY2017. Its units will begin trading ex-distribution on Dec 13, and unitholders will be paid on Dec 22.

Paul Chew, head of research at Phillip Securities, says APTT’s yield is attractive and sustainable. “Operating cash flows are supported by recurrent monthly cable TV subscription fees and APTT operates in a monopolistic environment,” he says.

While APTT has an investment mandate to invest and operate pay-TV and broadband businesses in Taiwan, Hong Kong, Japan and Singapore, its sole investment now is TBC. TBC is the third-largest cable TV operator in Taiwan and has been owned and managed by Macquarie Group entities since 2006. Macquarie APTT Management, the trust manager, is part of Macquarie Infrastructure and Real Assets, which is itself a division of Australia’s Macquarie Group.

Even as the pay-TV and broadband industry struggles with structural changes, such as the trend of “cord cutters”, APTT has demonstrated its ability to grow its earnings. For 3QFY2017 ended Sept 30, APTT posted an 8.9% y-o-y rise in earnings before interest, taxes, depreciation and amortisation to $50.8 million. Revenue rose 6.5% y-o-y to $84.5 million.

TBC divides its business into three segments: basic cable TV, premium digital cable TV and broadband internet access. The basic cable TV business is the largest. For 3QFY2017, it posted revenue growth of 7.7% y-o-y to $68 million. Of this amount, $53.3 million came from so-called “subscription revenue”, which is largely the NT$518 ($23.25) a month paid by each subscriber. While the total number of subscribers has held steady at about 762,000, the average revenue per user (ARPU) was down slightly from NT$522 in the preceding quarter ended June 30. However, TBC was able to generate higher revenue from non-subscription revenue, specifically the lease of TV channels to third-party content providers and also the sale of airtime and advertising space.

Meanwhile, its premium digital cable TV segment saw a 3.4% y-o-y rise in revenue in 3QFY2017 to $3.9 million. Each premium digital cable TV subscriber, about 195,000 in all, generates ARPU of NT$141 a month. Owing to discounts and promotions extended during the quarter, ARPU in 2QFY2017 ended June 30 was NT$145 a month. “The lower ARPU in premium TV is to stimulate pickup rate of these services. However, we have not seen much growth yet,” says Chew.

The third segment, broadband, saw a 1.7 y-o-y rise in revenue to $12.6 million in 3QFY2017. TBC had about 201,000 subscribers for this segment, each paying an average of NT$450 a month. While subscriber numbers held steady versus the previous quarter, ARPU suffered a slight dip, compared with 2QFY2017’s NT$453 a month. Again, the company attributes this to promotions and discounts.

Investors in APTT do face some risks. Notably, it appears to have relied on debt to sustain its payout in 3QFY2017. According to Chew, APTT generated free cash flow of $20 million in 3QFY2017, which is below the $23.3 million needed every quarter to pay the 1.625 cents a unit. However, next year, Chew expects APTT’s cash flow to improve as capital expenditure is expected to drop from $80 million this year to just $45 million.

Phillip Securities currently has an “accumulate” recommendation on APTT, versus an outright “buy” call prior to the release of APTT’s 3QFY2017 results. But it has kept its price target unchanged at 64 cents. “Our downgrade is due to the price appreciation of APTT and the resulting lower expected return. There has been no change in fundamentals,” writes Chew in his Nov 14 research note. Units in APTT have gone up 58.7% since the beginning of the year.

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