Starhub and Singtel both announced their Q3 and Q2 results respectively the past 2 days. For folks that are new to Investment Moats, analysis on the Singapore Telecom Stocks have been some of the more popular articles. [Analysis here, here, here and here ]
I won’t run through most of the fundamental numbers because telecom stocks provides results that does not deviate much from forecasts. And perhaps that is why we like about them.
As a summary here are my key take away on the 2 telecom results.
- Profit was 7.6% lower while revenue was 3.6% higher
- Debt on balance sheet is going down. Starhub have reduced debt since last year from 810 mil to 647 mil. This reduce their interest expense. Interest expense have always been low due to favorable interest rate Starhub enjoys. debt was a worry for people that don’t like Starhub, but to pay 647 mil, Starhub can pay it off with 1 year of their operating cash flow. This debt is a non issue and in fact looking to be the best among Singapore’s 3 telcos.
- Free cash flow for this quarter was 150 mil versus 80mil last year. This is enormous. 9 months free cash flow is 430 mil. Remember for Starhub to pay their 20cent dividend they need 340 mil. This means that 3 quarters of cash flow can more than pay their full year dividend.
- The main reason for better free cash flow is this years capital expenditure was substantially less. Capital expenditure is a double edge sword. If you spend on bad investments it is bad for share holders, if you don’t spend to replace or buy higher ROA assets, over a longer term it will be bad for Starhub competitively. Their capital expenditure is only 50% of their depreciation, will they lose their edge in the future?
- The yearly debt payoff is 300 mil. If they pay off the remaining debt in 2 years, we could see a big jack-up in dividends. A jack-up to 30 cent dividend is not a demanding expectation. But probably won’t be for the next 2 years.
- Net profit was down 1.2%, Revenue was up 3.9%, EBITDA was flat. Various subsidiary telecom companies cancelling out each other. Boring.
- Except for the Australian dollar, the other currencies are depreciating against the Sing dollar. This thus impacted the emerging market’s subsidiary telecoms.
- Operating cash flow this quarter was down 15% from last year. The main reason is a lower dividend received from emerging market telcos.
- Free cash flow was 900 mil. Unlike Starhub, depreciation almost equals capital expenditure. Singtel have always been growth focus and this done the right way is a good thing. However, in the past their investments have lower ROA then if they give back to share holders due to lower ROA then Singtel Singapore market. Remember that to pay out 16.8 cents dividend, Singtel needs around 2650 mil. They will be able to meet this with their cash flow.
- Singtel will only at most pay out 70% of earnings as dividends and based on projection that will only be 2515 mil, which can only pay 15.8 cents dividend. Long story short, don’t expect dividends to increase soon.
- Net debt is 6491 mil versus 4478 mil. Compare to Starhub, debt is climbing but still not a concern. Debt is good if it brings about good ROA. We are still not seeing it in their regional moves now.
- Bharti is still a problem child at the moment. That is all.
Overall, I see Starhub a one up over Singtel. The prospect based on figures definitely look better. The only caveat is whether they are not making enough capex. I also see the prospect of Starhub raising dividends more likely then Singtel. Should my guess is right on the dividend paying capability, Starhub is a better buy right now.
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