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Superb 2nd Quarter 2011 Free Cash Flow from Starhub

I think readers of my blog would have seen quite a fair bit of posts on Singapore Telecom shares Singtel, Starhub and M1 Limited.

The consensus from the public is that Singtel provides low but growing dividends, Starhub provides high dividends that will eventually need to come down as it is unsustainable and that M1 is the most attractive of all.

I have written time and again why Starhub’s debts is not unsustainable. [Explanation here] Starhub’s debt to equity ratio is high because their equity is very very very small.

A better measure for telecom shares as illustrated in my last article could be Net Debts over Operating Cash Flow.

Today Starhub released their 2nd Quarter 2011 results.

  1. Results
  2. Presentation Slides

Better Operating Cash Flow

Profit from operations improved. On first glance operating revenue for qtr 2 improved only 0.1%

The kicker for Starhub was that operating expenses improved 3.1%. That’s not a lot you say but the combination created a 22.6% improvement in profit from operations.

Finance Expenses and Income also greatly improved.

We look back and remember what Starhub’s CEO said about the difficult times when Starhub subsidized greatly their iPhone to compete with Singtel. Back then, he mentioned that they would rather expense this operating cost earlier and enjoy the long term income next time.

Now we could be seeing the fruits of his labor.

A big improvement to free cash flow

Starhub’s Operating Cash Flow for this quarter was 181 mil compare to 154 mil last year. Capital Expenditure stayed roughly the same.

The result of this is that Free Cash Flow for the quarter improved from 110 mil to 140 mil.

For the half year, free cash flow improve from 233 mil to 273 mil.

An improvement to Net Debt Position

Probably to silence the critics who say that debts is not sustainable, Starhub have been paying down the debts these years.

Bank loans totaled 750 mil versus 805 mil last year. Cash totaled 270 mil vs 237 mil last year. In total, net debt improved to 480 mil versus 568 mil last year.

How significant is 480 mil? It is estimated that Operating Cash Flow this year could be 700 mil and free cash flow could be 540 mil. This means that their free cash flow could clear their debts in 1 year.

The Significance of the free cash flow improvement

If Starhub maintains their good performance through the second half of the year, we could be looking at a free cash flow of 540 mil.

This 540 mil can go to pay down their net debt of 480 mil or to pay out more dividends.

More dividends? Now we know that what attracted a lot of people was the 20 cent dividend payout. People was questioning whether it is sustainable.

To payout 20 cent, Starhub have to pay out 340 mil. Now with a free cash flow of 540 mil we can safely say they have no problems meeting this 20 cent dividend.

If Starhub wants to use the full free cash flow to pay dividends, they could improve dividend payout by 58%. This would roughly mean they can pay out 31.6 cents in dividends.

At my average price in my current portfolio of $2.54, my yield would have been 12.44%.

My first purchase was at $2.10 and I do know a lot of folks who have it around that or below. Our yield on those purchase would have been 15% in 1 year!

Now these are estimation and I am sure Starhub will not pay out so much. But it is good to know that even if they do not pay us, it goes to paying down debts or keeping as cash for other purposes.

I was stupid to sell part of it at 2.69 but bought back again at 2.69. If Starhub continues to improve like this, then I am sure the share price would appreciate as well.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.


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Sunday 7th of August 2011

1st is subsidiary consolidated while associate and jv (for this case) equity acc.. Those associates and jvs already contribute greatly with better profitability as a whole.


Tuesday 9th of August 2011

hi donmihaihai, thanks for the explanation. i will relook siaec. the consensus capex outlook seem to be point to higher capex for the next 2 quarters. if that is the case then perhaps you are right that I shouldn't be extrapolating


Sunday 7th of August 2011

Hi Drizzt,

I remember few months ago there was one announcement by Starhub that they signed cable tv contract with MBS casino, do you know where (how) to get the figure (revenue), just want to know what is the contribution percentage to total revenue.



Tuesday 9th of August 2011

hi gregg, honestly i do not have that data with me. But i think it does not make a significant dent to the bottomline.


Saturday 6th of August 2011

I have no opinion on SPH businesses and share price. Ditto the same for telcom.

What i pointed out was that is not the way to look at cashflow. And neither is it that whether you are prepared for a weaker 2H.

Take Starhub as an example.

2Q2011 Operating cashflow before working capital changes - 158.1 Net cashflow from operating activities - 181.7

FY2010 FY2009 Operating cashflow before working capital changes - 606.1 659.8 Net cashflow from operating activities - 669.6 692.4

By using figures from net cashflow from operating activities, that mean that you are expecting the company to keep "generating" cashflow from working capital. How is it possible? Great if it is able to reduce working capital requirement but it can't keep going.

It is about being precisely wrong. It is the same about SPH when they were developing condo. And for SIA Engineering, while it is somehow diff, concept is the same. Just because cashflow statement says it is getting more in dividends than earnings for a few years doesn't mean it will continue. For it to continue, their profitability will shame all kind of businesses that I know of.


Sunday 7th of August 2011

hi donmihaihai, thanks for pointing that out. seems like i have made a mistake there. I think my mistake is thinking that working capital will equate themselves. It looks i am probably wrong the ability to pay out more conservatively.

but regarding SIA Engg, isn't there anyway for subsidiary to have profitable growth and contributing to the parents?


Friday 5th of August 2011

This is an example company that can operate with 100% debt because of solid cashflow more than debt that seem to be "guaranteed" from clients. But i feel more comfortable if there is some net cash reserve for any emergency. What emergency? But i may start to take nimble bite if price permits. Dividends is really attractive.

Not vested


Saturday 6th of August 2011

Hi Temperament, free cash flow is not always going to go up for telecoms. That is definite.

It doesn't make sense to go net cash. The only telco i know that does that is Chunghwa Telecom (ADR:CHT) which is net cash and used to pay a dividend of 5-6%. Superb if you ask me.

With rates so low and predictable cash flow, no reason not to borrow. Starhub have built up 270 mil. I feel that is solid enough.

At 2.70, yield is 7.4% At 2.50, yield is 8% At 2.30, yield is 8.7% At 2.10, yield is 9.5% At 1.90, yield is 10.5%

Compare this to REITs, i think this is a better deal. They have better free cash flow compare to REITs. They don't have to do cash call because they can conserve cash and borrow debts at a lower rate. They have a utility business model that is slightly defensive.


Thursday 4th of August 2011

Extrapolation of a quarter cashflow is an easy way to hell. A few quarters of superb cash inflow doesn't mean superb. And few quarters of lousy cashflow doesn't mean the opp.

Remember SPH!


Saturday 6th of August 2011

Somehow donmihaihai, when i was drafting this, I got a feeling you would want to remind me of this. We can be happy of this yes, but i thought long about what drives Starhub and their business risk. Cash flow is going to be predictable. I am always ready that Qtr 3 and 4 is going to be lower, but my hunch is that it will not be since on the telco scene there aren't many big changes.

dnhh, notice that SPH was brought up alot. its either i get caught with too much mistake in my homework or that you have an opinion about SPH as a business. I have to admit i ponder a fair bit about it but couldn't make sense of it 5 years down the road. perhaps you can share abit of what you think of it.

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