Note: All data mentioned in this article can be found in this spreadsheet over here.
I get this alot and to tell you the truth, I did ignore Starhub in the past because of this. The debt is enormous!
2009 Long Term Debt = 605 mil
2009 Assets = 1732 mil
2009 Equity = 125 mil
Debt to Equity Ratio = 605/125 = 4.85 times !!!!!
This is enough to put off investors since a high debt company is a dangerous company to own.
It is likely that they will face alot of refinancing problems in the future and they will refinance at a higher cost thus eating into the investors dividends.
I was in this discussion at Channelnewsasia forum on this topic and was asked what is Starhub’s take on their so called debt situation.
since i am not the best person to answer this question, i contacted Starhub’s Investor Relations and Ms Jeannie Ong was kind enough to explain to me:
The question i post:
Good day to you. What I notice is that compare to othe Singapore telcos, starhub’s short term debt + long term debt is so massive that it dwalfs the equity by 2 times.
the concern is that in view of so many companies facing problem with refinancing their existing debts, how does starhub manage the risk there?
if I am not wrong starhub’s policy is for debt to be 1.8 times of ebitda. Does that mean that the gauge to measure debt risk for starhub is through this metric?
The answer from Ms Jeannie:
When banks lend to the StarHub Group, it looks at the Parent Co – StarHub Ltd’s shareholders equity because all borrowings are arranged centrally.
At the Company level, the Shareholders fund and reserve stands at $1.24 billion.
Group Gross Borrowings and net borrowings (net of cash) is $661m.
Hence traditional Net Debt / shareholders fund is only 0.53 ratio.
The Group Shareholders funds which is at $125m is after the consolidation and elimination of the investment in SCV of $1.174 billion on merger accounting of 2005. Hence the consolidated equity would not reflect the current cashflow and financial strength of the Group.
The Group Net Debt/ EBITDA ratio is used to track our long term capital management direction. Currently it is at a healthy 1.02 times.
Here is a snapshot from their 2009 annual report
The right side figures are the figures consolidated at the Company levels, while the right side is at the Group levels.
Notice the difference in the share holders equity. Now i really am not an accountant by training and it brought a realisation that had i been stronger in my knowledge of balance sheet i would not have the need to ask her.
If what she says is valid, then 681 mil in debt / 1241 mil in equity will come up to a 0.50 times debt to equity ratio. Which is on par with M1 Limited.
Analyzing the risk using Free Cashflow cover
There is another way of looking at it. Sure 605 mil is a large amount. Surely much larger than M1’s 250 mil.
But how much is 605 mil actually. To put it in perspective:
2009 Starhubs Operating Cashflow = 692 mil
This is more than Starhub’s entire long term debt.
2009 Starhub’s Capex = 231 mil
Jeannie have given a forcast that capex is likely to be more in 2010 at about 300 mil
2009 Starhub’s Divdiend payout = 316 mil
This is on 18 cents dividend. The 2010 forecast is a 20 cent dividend which comes up to 347 mil
If we calculate the Free Cashflow, which is Operating Cashflow – Capex,
692mil – 231 mil = 461 mil
This 461 mil is what Starhub can choose to either pay dividend or pay off debts.
So how many years does it take to pay off 605 mil?
If starhub cuts dividend by half, which is 9 cents dvidends (around 3.5% yield at $2.34) they will take 605mil/(461-150) = 2 years to pay off 605 mil
If starhub cuts dvidend all the way to zero, they will take 605 mil / 461 mil = 1.3 years to pay it off.
Whichever way you look at it I think Starhub’s management of this mathematically shows they are doing a much better job than M1.
Sometimes we trust the ratios we use too much. its only when we examine closely do we really put things into perspective. Do correct me if i made a wrong analysis