(Stocks Discussion) SGX: StarHub (SGX: CC3)? - Seedly
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Anonymous

Asked on 29 Apr 2019

(Stocks Discussion) SGX: StarHub (SGX: CC3)?

Discuss anything about share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Do take note that the answers given by our members are just your opinions, so please do your own due diligence before making an investment!

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Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated on 06 May 2019

TL;DR With so much disruption in telco sector and Starhub losing profitability, I don't think this will be a good stock to buy. Also, their dividends can't be sustained.

Source: StarHub Annual Report FY2018

Business Profile

Most of the news from StarHub hasn't been too positive lately, and they have gotten flak for the high amount of dividends they are paying. Currently, StarHub is the second largest of the three telecom operators in Singapore. They also provide mobile services, pay-TV, fixed broadband and fixed voice services, popularly known as quadruple play services.

SWOT Analysis

Source: HardWareZone

Strength: Mobile network and services is a necessity of individuals and businesses, and although demand may fall, they should remain a mainstay of Singapore.

Weakness: Except for the enterprise segment, revenue has been decreasing for all other services, especially pay-tv. This shows a decreasing demand for their services.

Opportunities: The enterprise segment seems promising, with quite strong growth last year. This is primarily attributable to the growth in managed services and the consolidation of ofenterprise solution businesses.

They also expanded their offerings into other areas, such as data center, cloud services, robotics, and digital platforms to enable digital transformation. With the Smart Nation initiative in full swing and more companies tapping on digital transformation, revenue might grow even further.

Threat: Competition among the telcos is likely to increase even further. Additionally, as the Singapore market is limited, the market won't grow much. Additionally, with more disruption within for mobile services and streaming services, Starhub's bread and butter services will worsen.

Financials

Profits

Source: StarHub Annual Report FY2018

Revenue has been steadily decreasing since 2015 at $2.4bn, to $2.3bn last year. In 2018, the bulk of the revenue came from Mobile (35%) and Enterprise Fixed revenue (21.6%). What had dragged revenue down was a large decrease in mobile revenue (8.1% decrease) and Pay TV Revenue (11.9% decrease). Thankfully, their enterprise revenue stream increased by 16% to 511m.

Source: StarHub Annual Report FY2018

This decrease in revenue could have occurred due to a reduced need to re-contract and an increasing number of users using SIM only plan instead or a lower cost monthly plan. This reduces the Average Revenue Per User. The decrease in revenue could also be due to the entry of the 4th telco in Singapore. Additionally, Starhub could have been too focused on their pay-tv subscriptions, which suffered the biggest dip. With online alternatives such as YouTube, Netflix and other online sites for entertainment, many people have stopped using Pay-TV.

Source: StarHub Annual Report FY2018

Worryingly, all the different forms of costs have also increased as well, reducing the firm's profitability.

Balance Sheet

Starhub's balance sheet doesn't look strong either. Starhub only has a current ratio slightly more than 1, with a lot of current assets tied up in contract assets and receivables, and a huge sum of payables as well.

The company seems to be holding a lot of debt as well, with a D/E ratio of almost 2 times. The company has a Net Debt/EBITDA ratio of about 1.6, and an interest coverage ratio (EBITDA/Interest) of 16.5. Such figures seem like Starhub should be able to pay back their debt. But as we shall see, cash flows, another important metric, isn't strong.

Cash Flows

Source: StarHub Annual Report FY2018

StarHub seems to be quite a capital intensive business, with depreciation and amortization being almost equal to profit before tax. Also, purchases of plant, property, and equipment being two-thirds of their operating cashflows. The company's management of their working capital conditions has also reduced cash flows by almost $100m for 2 years as well.

Starhub reported a free cashflow of 146mn, which is the cashflow left for both lenders and shareholders of the firm. This number isn't very good, considering that the company owes a lot of debt, and some of these cash flows will be used to service such debt.

Dividends

With a dividend payout ratio of 1.38, this is way too high. This ratio shows you that the dividends paid were 1.38 times larger than net profit. Additionally, dividends as a percentage of free cashflow are also almost 190%, which is unsustainable. Considering that the business is losing profits every year and doesn't have strong cashflows, dividends will drop.

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Goh Kah Kiat
Goh Kah Kiat
Level 5. Genius
Answered on 05 Jun 2019

You can find my detailed analysis here:

https://risknreturns.com/2019/03/15/wont-invest-in-starhub/

TLDR: Disrupted business, difficult turnaround, dividend barely sustainable. Best to avoid until signs of a turnaround emerges.

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