I posted this over at Sharejunction and Channelnewsasia forum to address comments that starhub have too much debt that it is unsustainable.
Take the latest figures on starhub. you can reference them on my google spreadsheet here [link here >> ]
Enterprise value and operating cashflow
The current share price = $2.28
The enterprise value, which is (Market Cap + Long Term Debt-Cash) = $2.32.
That’s close to current share price since its equity : longterm debt:short term debt ratio is 1:6:6
The FY2009 Free Cashflow = $0.26.
This free cashflow is what is earn in 2009 minus away any capital expenditure.
From this you will be able to see that Starhub to pay out $0.20 in dividend, they still have $0.06 cents left over.
If we take Enterprise Value per share dividend by Free Cashflow you get a figure of 8.9 times.
What this means is that all else being equal, the cashflow generation after capex should allow you as an investor to recurperate your 100% investment in 9 years time. Its average compare to other dividend yielders.
Discounted Cashflow Analysis
I normally hate to do Discounted Cashflow analysis, because growth rate and discounted rates are so hard to predict.
Growth rate: We take that this lousy stock grows at 2% per year
Discounted Rate:Inflation or required rate of return being 2% per year
Basically with these figures it is essentially stagnating.
Using a Free Cashflow of $0.26 we get a present value for the next 10 years of cashflow as $2.80.
That does make the share price currently at SGD2.28 very undervalue. However if you use $0.20 as it is the dividend, you get a terminal value of $2.18
Of its high debt
I am not sure why the financing of Starhub is such that the majority of it is debts. Many people are quite turn off by this.
My reasoning for this is that based on the annual reports, the interest rates paid on short term is from 2% to 4%.
Compare that against the dividend yield we investors require at 9%. Which is cheaper?