Note to all:Figures and Data used in this analysis can be found in this google spreadsheet here >>
For an orientation of investing in the local 3 telcos do read up my guide to investing in Singapore’s 3 telcos Singtel, M1 Limited and Starhub and how they compare to the world’s top telcos.
Starhub today release their Q1 Results and it looks bad on the surface:
Profit, Revenue and Cost Analysis
Net Profit fell by 48.3% from same quarter last year
This is what is likely to depress tomorrows share price. Nobody likes to see a company getting its margin’s squeezed. How bad is this 42mil quarterly profit. Let me just say that the last time it was this low its in 2005.
In terms of revenue its been maintained. We have not start to see any effects of churning as part of losing the English Premier League rights.
In fact if you say the weakest was on the broadband front.
Here is where the main problem lies. A 50 mil increase in cost of sales and a 25 mil increase in other operating expenses. Apparently Staff cost and miscellaneous cost are increasing. This could very well be the after effects of not having call centers housed overseas but done locally.
Cost of Sales
Cost of equipments increase a whopping 92% which amounts to 45 mil. How much is 45 mil? thats almost half of what Starhub can pay us as a quarterly dividend or a 2.5 cent dividend.
No thanks to the need to subsidize phone subscribers for their iPhones. Should this climb some more next quarter and if revenue doesn’t grow, then in Singapore M1 and Starhub may not be a good business to be in.
Starhub is adding more customers in terms of their mobile plans. What is interesting here?
- Data Traffic is increasing at a good pace.
- ARPU is falling. This is not good but it means that when revenue per user falls they got to get more subscribers.
- Average acquisition cost per gross connection increase from 106 to 122. This is the worst number. it means that to acquire each connection, the costs are increasing or the cost to subsidize and price lower than their competitors are increasing.
Pay TV Revenue
ARPU for Pay TV is falling. But they are maintaining the subscribers. This will change in Q3 trust me.
Broadband ARPU is also falling.
What we want to know here is whether people are still buying this Hubbing Concept. Apparently i don’t see much change here.
Balance Sheet Analysis
Cash Holdings is observed to increase substantially from SGD 234 mil to SGD 316 mil.A change of SGD82 mil.
There are 2 ways in which cash can increase. Debts or through profits translating to more cash.
Lets take a look at the debt levels.
Current Liabilities fell from SGD 925 mil to SGD 813 mil. A change of SGD112 mil.
Long Term Debts increase from SGD 605 mil to SGD 751 mil. A change of SD 146mil.
Net increase in liabilities was SGD34 mil.
Essentially half of the increase in cash holdings was due to increase borrowing and half of it is due to profits.
Ability to pay of debts
So how is their debt levels compare to 2009?
Taking debts (longterm +short term) of SGD 864mil – Cash of SGD 316mil = SGD 548mil
In 2009 Q4, debts (longterm +short term) of SGD 895mil – Cash of SGD 234 mil = SGD 661mil
Essentially their net debts borrowed are reduced.
Cashflow, Capex and Dividend Analysis
Ok we reached the point where everyone is most interested in
Depreciation Remains the same at SGD 60 mil
Capital Expenditure decreased from SGD 57 mil to SGD46 mil.
A note is that guidance for Capital Expenditure for Starhubs full year is forecast to be 14% of operating revenue. Since 14% of quarterly revenue is SGD 77 mil. This is much lower than that. But Capex for next few quarters could increase. traditionally the first quarter’s capex is the lowest.
Starhub have indicated they forecast capex to increase this year due to their subsidiary Nucleus Connect required capex as part of the operator for the next generation broadband.
Operating Cashflow decreased from last year Q1 SGD 218 mil to SGD 168 mil. How is it they managed to stay inline with Q4 2009’s operating cashflow of SGD 139 mil?
Simple. Remember the net liabilities increase by near 34 mil. This made up for the fall in profit. This is no doubt to improve the liquidity.
There are no dividends paid out recorded in Q1 statements. However we do know that the guidance for Starhub is to pay a minimum of 5 cents dividend per quarter.
So can Starhub safely pay 5 cents dividend this quarter?
Lets take a look.
Free Cashflow = Operating Cashflow – Capital Expenditure = SGD 168 mil – SGD 46 mil = SGD 122 mil
So how much is a SGD 5 cents dividend per quarter? That comes up to SGD 85 mil.
So essentially, Free Cashflow – Dividends = 122 – 85 = 37 mil.
Which means that they have excess cash left over. But do note! Liabilities increase by 34 mil. So this means that their cashflow from profits just managed to pay that SGD 85 mil.
This quarters results shows that Starhub is indeed facing problems
- Everyone is focusing on Pay TV challenges, but this have not set in yet. We might expect negative impact in the future here
- Cost of equipments are increasing at an alarming pace. If this is the way to go, it will eat into profits and cashflow
- Starhub’s ability to pay that 5 cent dividend per quarter is seriously looking very challenging. They just managed to pay enough from profits
- Debt levels have gotten better. Thats about the only good news
- ARPU for all segments down. The competition is intense that it is making telcos that have weak positions weaker. Namely Starhub and M1
- They better make sure they increase revenue from NBN.
While you should not make your investment decisions on one quarter results, but i got a feeling that the problems are going to get more intense.