• 1Q20 revenue and EBITDA beat our expectations. Results beat our estimates in part due to the appreciation of the Taiwan dollar by 4.7% during the quarter.
• APTT announced a 1 for 4 rights issue with an issue price of S$0.128 per share. Upon completion of the rights issue, DPU will be cut from a quarterly 0.3 cents to 0.25 cents. Amount raised is S$46mn and will effectively be underwritten by the Trustee-Manager owners.
• We were disappointed with the 16.7% cut in DPU accompanying the rights issue. The effective dividend yield drops by around 1.5% points post announcement of the rights issue. Nevertheless, we are upgrading our recommendation from NEUTRAL to BUY. Firstly, the share price has corrected by 23% since our last report despite the limited impact of the outbreak on the company; Secondly, the business operations have turned more stable; Thirdly, dividends are much more sustainable at the current levels. Our target price will peg APTT at around 10x EV/EBITDA. We upgrade to BUY but lower our target price to S$0.15.

The Positives

+ Revenue is better than expected. We were modelling around 4% YoY decline in revenue. Excluding the currency impact, revenue rose 3.6% in local currency terms. Non-subscription jumped 57% to S$14.9mn due to the sale of certain in-house content to channels plus additional advertisement revenue. Such revenues are lumpy.

+ Broadband revenue stable. Broadband revenue rose 4% but was flat in constant currency terms. ARPU declined 12% to NT$350 per month (S$16.6), but new subscribers responded to the lower price plans by expanding 10% YoY to 242k. Another positive was that the fall in ARPU of NT$6 on QoQ basis was the smallest in seven quarters.

+ Capex well contained so far.  1Q20 capex dipped to S$11mn or 14% of revenue. We were modelling 23% of revenue or S$65mn. Nevertheless, the company did highlight that there was some deferral in capex and 1Q20 fall is not representative of the expected downtrend in capex.

The Negatives

– Effective DPU has been cut. Following the rights issue, APTT will be lowering their DPU from 0.3 cents to 0.25 cents per quarter. The cut in dividends is only effective upon completion of the rights issue. Also, APTT will review its FY21 dividend policy in their 3Q20 results.

Outlook

Broadband is the bright spot with the growth in subscribers offsetting the weakness in ARPU. Core cable TV remains problematic with cable TV subscribers falling close to 3% p.a. Therefore, the ability to reduce capex will be critical to offset the falling cash-flows from cable TV business.

Upgrade to BUY and target price lowered to S$0.15 (previously S$0.165)

We were disappointed with the 16.7% cut in DPU accompanying the rights issue. The effective dividend yield drops by around 1.5% points post announcement of the rights issue. Nevertheless, we are upgrading our recommendation from NEUTRAL to BUY:

• The share price has corrected by 23% since our last report despite the limited impact of the outbreak on the company;
• The business operations have turned more stable: broadband revenue is stabilising and the losses in cable TV subscribers is not accelerating;
• The dividends have become more sustainable at the current levels. For instance, dividends per quarter is S$4.3mn against FCF of S$23.5mn generated this quarter.

The larger driver to the share price in future will be the ability to generate new revenue streams from data backhaul services offered to wireless operator rolling out 5G. APTT has said revenues will be material, but there is little visibility on the quantum and timeline.

Details of the rights issue:

1. Terms: 1 rights unit for every existing 4 held (renounceable)
2. Issue price: S$0.128 per unit (TERP: S$0.129).
3. Amount raised: S$46.2mn
4. Purpose of proceeds: Partial repayment of offshore facilities (S$45mn)
5. Irrevocable rights undertaking: Refer to Figure 1