• 1Q18 revenue and EBITDA disappointed, after declining by 7% YoY. Our expectations were flat revenue and EBITDA.
• Revenue was negatively affected by weaker selling prices from TV prepaid packages and a significant drop in non-subscription revenue sourced from TV channel leasing.
• We have cut our target price to S$0.52 (previously S$0.62). This is after lowering our earnings forecast and terminal growth rate assumptions. The yield is attractive, but capital appreciation will be challenged until there are more stability in revenues. The share price decline has triggered an upgrade to BUY.

The Positives

+ Content cost crept downwards. Largest positive was the ability of APTV to lower content (or broadcast cost) by negotiating directly with the content provider and avoiding agents.

The Negatives

–  Revenue was the key disappointment. There were two key reasons for revenue decline. Firstly, ARPU fell as higher discounts were given for prepaid customers. We were modelling flattish ARPU. Secondly, non-subscription revenue fell 21%, when we were anticipating flat revenues. The loss of some shopping TV networks affected revenues.

–  Decline in subscribers. After holding steady at 762k for the past five quarters, subscribers experienced a 1k decline. Whilst not alarming, this is the first decline since listing. Important that this decline does not become a trend. This will imply cable TV services are no longer a utility-type service and there is another form of substitute available.

–  Capex spiked up. After the end of last year’s premium digital rollout, we expected capex to decline to S$45mn (revised to S$55mn for FY18e). However, ordinary capex more than doubled this quarter, as APTV aims to extend their fibre connection to the home as they offer faster 500MBps broadband services.

Outlook

We are concerned. Cable TV is a product with hardly any pricing power. It will be a challenge for APTV to raise pricing. The fall in subscribers is a lesser concern now, as the decline was marginal.

Upgrade to BUY rating. Target price cut to S$0.52 (previously  S$0.62)

We cut our EBITDA estimates by 6.5% as we lowered our ASP and subscribers for cable TV. There is value at current share price, but any meaningful capital appreciation will be capped FCFs hurt by softening revenues and stubborn capital expenditures.