Starhub announced their full year 2011 financial results. Overall, my take is that they got back to pre-iphone competition level of operations. I would not say it is spectacular but rather, the reasons operation wise, why we like Starhub is finally back.
Here are some of my takeaways:
- Gross profit 4th quarter grew by 15.3%. Considering the handset subsidies costs over the past 2 years, its good to see that growth is maintained.
- Gross profit full year grew by 16.3%. Considering past 2 years of competitive landscape, its good to finally see growth overall instead of profit drawdowns year on year.
- Business Segments
- 4th quarter mobile revenue grew by 3.1% and full year mobile revenue grew by 3.1%. A note that mobile revenue is the biggest contributor to the top line.
- 4th quarter Pay TV revenue grew by 7.5% while full year Pay TV fell by 4.9%. This is the only segment that shows negative growth owing to the loss of BPL. Here is where competition is intense and we do not yet have visibility how the new IDA rules on cross carrying of content will do to Starhub’s Pay TV.
- 4th quarter and full year broadband grew by 2.7% and 2.4% respectively.
- Fixed network grew by 1.5% overall.
- We are seeing a 5% fall in pre-paid mobile revenue versus a 5% rise in post-paid mobile revenue. The ratio of pre-paid to post-paid revenue is 1:3.88.
- Post-paid ARPU was S$76 for the quarter versus S$73 last year. Higher ARPU was due to higher subscription revenue from increasing mix of “SmartSurf” plans, which is their 3G voice and data plans.
- In terms of voice calls to data usage, there is a 9% reduction in voice calls and a 16% rise in overall data usage, reflecting a shift towards data. This trend looks set to continue and had it not for the bundled plans, it will be difficult for the telecom to explain to end user why they still pay S$44 for a voice+data plan.
- Post-paid churn have increased to 1.2% versus 1.1% last year. This is somewhat of a small concern as although it is relatively small, would indicate that given the release of the same set of iPhones and Android phones, consumers would prefer competitors more than Starhub.
- Pay TV ARPU was lower year on year. However, churn remain constant. This shows that to retain customers, the margins are affected to offer more competitive packages.
- Broadband ARPU was lower year on year as well.
- Fixed Network Services was the surprise where they grew Data & Internet by 1% and Voice services 4% for the year. Data accounted for 5 times that of Voice.The higher take up was attributed to increase take-up for NBN services by retail service providers.
- The higher voice services revenue was attributed to higher subscription of local voice services and increased interconnect revenue but offset by lower IDD revenue.
- Business Costs
- We are seeing a 22.8% rise on cost of equipment sold due to higher subsidies of smart devices. Particularly significant is the 68% rise in cost of equipment for the 4th quarter which looks to indicate that more smart devices are sold and greater subsidies are required. This will only get worse when LTE gets deployed next year and more subsidies are required to make people switch to LTE compliant handsets.
- We are seeing a 6.8% rise in Staff costs and 8.5% rise in Marketing and Promotion costs versus a drastic reduction in Operating Lease, Repair and Maintenance and other expenses. Probably my gripe here is that costs are rising much faster than the added revenue.
- Cash Flow Analysis
- Operating Cash Flow was significantly lower due to higher inventories and receivables for the quarter. This come as a surprise but perhaps is an operation decision to hold more stocks.We will need to observe future operating cash flow for tell tale signs of stress in operational cash generation.
- I was surprise by the high capital expenditure of 116 mil in 4th quarter versus the previous three quarters which add up to almost 120 mil. Last year this time the capex is also very high in the 4th quarter. Capex remains 10% of operating revenue inline with company full year guidance.
- We were expecting much lower capex so this was against my very own estimates. It looks to follow the management capex guidelines of not more than 11% of operating revenue
- Free cash flow was S$450 mil versus S$400 mil full year. This is greatly attributed to increase in operating cash flow due to higher depreciation and lower capital expenditure.
- Dividend payout remains at S$343 mil for $0.20 dividend payout. This is higher than net profit but well within the free cash flow levels
- Capital expenditure was S$246 mil versus S$277 mil of depreciation, showing a consistent replenishment of assets, thus Starhub do not run the risk of erosion of NAV.
- Net debt repayment was S$143 mil versus S$90 mil last year. This shows management’s commitment to reduce debts
- Debt Analysis
- Net debt was S$483 mil versus S$568 mil last year. Management looks to continue to use excess free cash flow to pay down debts
- Net debt to assets is at 31% which is at a comfortable level
- Net debt to EBITDA is at 0.69 which is at a very healthy level, far lower than the 1.1 level management is targeting.
- With a free cash flow of S$450 mil it also means that by not paying any dividends, Starhub can theoretically pay off their debts in 1.07 years.
- Growth outlook for 2012
- There will be a continued shift from voice to data
- Content cost will remain high despite the new cross carry guidelines
- Take up for NBN is set to continue but currently hampered by operational issues which are pending resolution with various parties.
- Revenue growth is forecasted to grow in the low single digit range.
- EBITDA margin as a percentage of service revenue is set to remain at 30%
- Capex guidance is expected not to exceed 11% of operating revenue
- Dividend payout to remain at 20 cents
I was somewhat disappointed that there isn’t much mentioned of their plans to differentiate from the competition. I written recently the future trend of telecoms in Singapore (read here) and it would be paramount that with a LTE and NBN pipe, Starhub provides the best content to shift subscribers or provide the best QOS.
Else they will end up in this endless lowest switching cost game.
My forecast of higher dividends looks set to miss since free cash flow is forecasted to be lower than S$450 mil this year and capital expenditure will not significantly reduce.
Still you ask yourself whether you are contented with a currently yield of 7% for a service utility that people will continue to use for the foreseeable future.
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