• Revenue met our estimates but EBITDA was modestly better than expected due to the significant fall in content cost.
• Both subscribers and ARPU for cable TV still trending down. Broadband revenues finding some stability on a QoQ basis.
• Capital expenditure remains elevated at almost 25% of revenue (1H19) vs 22% a year ago (1H18).
• The attraction of APTT is the committed two-year DPU of 1.2 cents per year (or yield of 7.1%). The yield stands out in the current environment of depressed interest rates. We raised our target price marginally to S$0.165 as we increased our EBITDA forecast and lowered our interest expense assumptions. We peg APTT at around 9.5x EV/EBITDA. This is a 15% discount (prev. 10%) to their much larger Taiwanese peer valuations. We are upgrading our recommendation from REDUCE to NEUTRAL.

The Positives

+ Gap down in content cost. Broadcast cost was down 21% YoY. As a percentage of total revenue, there was a saving of 2.8% points compared to a year ago. APTT has signed new three year agreements at much lower prices. Content cost is entirely on fixed cost basis.

+ Broadband revenue starting to stabilise. In broadband, APTT quarterly revenues have been on a downtrend since the S$13.1mn peak, four years ago.  Subscriber growth has grown but pressure on ARPU has dragged down revenues.  Cable TV ARPU has been sliding for almost three years. This quarter, broadband revenues have started to stabilise on a QoQ basis as subscriber growth has been strong (+2% QoQ). ARPUs are under pressure by aggressive pricing of unlimited mobile price plans.

The Negatives

– Cable TV operating metrics still sliding. The decline in TV subscribers since 1Q18 persist.  ARPU is also contracting for the past twelve consecutive quarters. There are no signs the weakness in operations is abating anytime soon.

– Capex still elevated. No guidance has been given on capex for FY19 except it will taper down in FY20. Capex is to build up future backhaul business especially with the arrival of 5G. As present, capex is now ~25% of revenue compared to 22% in 1H18. We modelled 22% of revenue capex. The high capex has aggressively cut FCF down by 41%.

Outlook

Both pricing and subscriber base for APTV core cable TV business is declining (Figure 1). The lower broadcast cost was a welcomed surprise to lower the fixed cost structure of the cable TV business. Broadband is more profitable than cable TV. However, the fall in ARPU is not sufficient to stem the decline in total broadband revenues despite growing subscriber base.

Upgrade to NEUTRAL and target price of S$0.165 (previously  S$0.16)

We raised our target price marginally to S$0.165 as we increased our EBITDA forecast and lowered our interest expense assumptions. We peg APTT at around 9.5x EV/EBITDA. This is a 15% discount (prev. 10%) to their much larger Taiwanese peer valuations (Figure 2). We are upgrading our recommendation from REDUCE to NEUTRAL.

The attraction of APTT is the committed two-year DPU of 1.2 cents per year (or yield of 7.1%).  The dividend yield stands out in the current environment of depressed interest rates. APTT has sufficient cash-flow over the next two years to cover their guided 2-year DPU guidance.