The last time I wrote about Starhub was a brief article in 2014. The beauty of Starhub is that since then business have been humming along.
When you get invested in a telecom operator in a mature region, unless you have a competitive edge over your competitor, usually much of your organic growth depends a lot on the oligopolistic nature of the business, economies of scope to sell services and products that are matured enough for the consumers in the region.
Telecoms have reached an inflection point where innovation in the past few years have stagnate. Since the move to data plans over voice plans, the telecom operators have not been able to provide application services and are still relying on selling mobile, broadband, fixed line to enterprises, international data call and pay TV.
Due to this nature, Starhub have been a consistent generator of free cash flow and due to the free cash flow, a consistent $0.20 dividend.
The free cash flow is consistent because the market share for telecom operator in the city have been rather consistent, with the last big fight happening when Singtel have the exclusive iPhone distribution rights.
From the revenue breakdown above, the change in each segments year on year have been rather minute.
However this year the net profit was consistent with a slight growth from $370 mil to $372 mil.
To pay for the $0.20 annual dividend, Starhub would need an amount of cash coming up to $340 mil. The annual earnings show that they are able to cover this.
However, free cash flow fell from $333 mil to $216 mil. Both last year and this year’s free cash flow was not able to cover the dividend payment of $340 mil.
The difference would have to come from Starhub’s existing cash holdings or funded by debt.
To be fair if we take EBITDA (instead of net operating cashflow from operations) – capital expenditure, last year and this year’s cash flow are $406 mil and $383 mil respectively.
If we ignore the working capital and minor cash flow that can be funded by debts, this cash flow can cover the dividends.
Given these 2 contrasting piece of information, my conclusion is that Starhub for these 2 years are able to fund their dividend from an operating cash flow perspective, and given the history of operations, we can give the management the benefit of the doubt that they are managing the cash well, else they would be cutting dividends.
The major problem in this years result have been escalation in cost of sales. From the table above, we can see that this is an area that we should watch for in the future.
This is on top of potentially higher competition from the forth telecom operator. The likely scenario is all 3 telecom operators have to give away part of their mobile revenue base to the new opeartor.
Your decision points
To purchase, remain invested or divest Starhub hinges on the following points:
- Return per Unit Risk
- Comparing against other prospects
In terms of valuation, Starhub is trading at an EV/EBITDA of 9.2 times at the current share price of $3.49. I deemed an EV/EBITDA of 6 times to be very attractive and the current 9.2 times to be fair if not anything to shout about.
If you hold it at this price, it is not overly expensive, but I do wonder if cost and capital expenditure spending trend is going to be prolonged.
The significance of this trend is that this will affect future EBITDA and thus might make the future EV/EBITDA to be higher than current.
We do not know so much about the trend of cost, but the guidance for capital expenditure will stay the same for next year, or around 13% of Starhub’s revenue, meaning it will not be reduced to the hey day of 10% of revenue like in the past.
While I have pointed out what is unfavorable, investors should evaluate the weight-age of these unfavorable points with the general business of a telecom operation. While capital intensive, the business is still government regulated, and that the capital intensive nature would mean controlled barriers to entry.
The recurring business nature might outweigh these short term unfavorables, meaning this goose might give you a more consistent stream of eggs then another business.
Since being invested, Starhub have not raised their dividends, and at current prevailing dividend yield of 5.7%, it does look more attractive than a few months ago. This comparing against Singtel’s 4.2% yield and M1’s 6.1% yield.
Markets voted down this poor set of results, and if you purchase Starhub at this price, the return per unit risk is higher than a few months ago, as the prices should have factored in a challenging environment, poorer growth expectation, lost in market share.
More risks have been uncovered and known to the general public, and thus likely factored into the share price (I explain risk and volatility here). If risks are not uncovered, and are unknown to you, your return per unit risk might be smaller than you think and thus not a good proposition.
Lastly, investing is about curating your portfolio so that you hold a good portfolio of stocks bought with a good return per unit risk.
While the attractiveness of Starhub have increased, putting them against other assets/stocks/business, there might be propositions with better returns (dividend yield + capital gains) for the risks you bear. It may make sense to shift.
Bear in mind the organic growth of Starhub from population growth, getting more market share and new services (if there is any), the ability and willingness for Starhub to increase their dividends from $0.20.
The more important thing is to make a sound evaluation, assessment and then a wise investment decision.
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Thursday 18th of February 2016
Interesting write up. Followed your portfolio and noticed you have sold off your starhub holdings today. I guess I know what is you assessment :)
Thursday 18th of February 2016
Hi Choon Yuan,
Yup but my timing is usually sucky. I had this for long time and to be fair had I evaluated well, I should have sold it when the yield narrowed and realized the growth rate is very narrow. That is something that needs to be worked on.