Starhub’s share price has taken yet another tumble in recent weeks following the announcement of a dividend cut. Management really took a sledgehammer to their dividend, cutting it by 44% from 16 cents to 9 cents per annum.
Now that the stock has settled in a rough trading range in the $1.50s, I decided to ask myself if the worst is over.
Balance Sheet Review
As with any income stock, I start with the balance sheet. Let’s be frank, the balance sheet isn’t pretty. Here are some balance sheet extracts and ratios I calculated based on their FY2018 year end results:
Debt ratios generally doesn’t look too good, with debt to asset ratios ranging from 39% to 63% depending on how conservative you are. Debt to Equity naturally is horrendous. Liquidity ratios are barely staying afloat. Not in dire straits yet, but on the edge.
Free Cash Flow & Dividend Review
Management alleviated some pressure on the company by cutting its dividend. Let’s see if Starhub is able to support this new dividend policy.
Let’s begin by estimating Starhub’s 2019 Free Cash Flow. I’ll assume that Starhub’s activity levels are largely going to stay the same, with slight adjustments for management’s guidance below:
Since service revenue and service EBITDA guidance are largely in line with current financial conditions, I think it is safe to assume FY2018 operating cashflow will be similar to FY2019. Of course, this is assuming management’s crystal ball is accurate.
As for capital expenditure, management guided that Capex will be 11-12% of total revenue. Assuming a 2% service revenue drop and a constant equipment sales revenue, FY2019 revenue is expected to be $2,325m. This translates into $279m of capex. If you add $282 million of spectrum payments, this becomes $561m of capital expenditure in FY2019.
Lastly, let’s assume that Starhub continues to pay the same amount of interest and perpetuals distributions as FY2018.
Taking into account all these assumptions, here’s my free cash flow and dividend calculation.
The FCF picture actually looks quite grim, even with the more relaxed measure of FCF using OCF before working capital changes still returns a negative figure. Only if you assume the $282m of spectrum costs is one off will you then be able to have sufficient FCF to cover the dividend in FY2020.
What this means is that even if Starhub just coasts along at its current business level, it is likely to have a net cash outflow in FY2019, which may result in it needing more debt to fund its operations.
Any potential catalysts to turn around this situation?
My analysis so far has been all doom and gloom. The only hope for Starhub is if the situation turns around due to some change in strategy. After all, Starhub recently ran a well produced and honest advertisement about change.
Efficiency Initiatives
Ever since the new CEO Peter K joined Starhub in July 2018, he has announced Strategic Efficiency Transformation Initiatives to try and turn around the company.
The most concrete initiative announced was a restructuring exercise that resulted in about 300 people being made redundant. This efficiency programme is expected to provide $210m is cost savings over 3 years from 2019. That works out to be about $70m a year, which could be sufficient to prop up the Free cash flow situation that I computed earlier.
Business Focuses
Some of the Strategic Efficiency Transformation Initiatives announced include:
StarHub announced today that as part of its strategic transformation plan, it will focus and continue to invest in new businesses such as the recently created cyber-security company (Ensign InfoSecurity), in digitalisation initiatives to transform customer experience and in industry-leading wireless and fibre services to deliver content and applications on any device to all consumers. The company will also accelerate investments in developing information and communications technology solutions and capabilities for enterprise customers.
Source: Starhub announcement on Strategic Efficiency Transformation Initiatives
So basically their strategy is invest in new businesses like Cyber-security, digitalisation initiative and focus on enterprise customers. This means they are adopting SingTel’s strategy while SingTel is already way ahead in those areas. Not exactly a winning strategy in my opinion, but only time will tell if they are able to execute.
Current Valuation
I can go on and on about P/E and other valuation metrics. To save time, let’s just go with the simplest one everyone is focused on: Dividend yield. At closing price of $1.55 today and a 9 cent dividend, that works out to a yield of 5.8%. Historically, Starhub has traded in the yield range of between 4+ to 9+% since the Global Financial Crisis.
Given the issues with the stock discussed earlier, I would need a much larger yield before I would invest in the company. Assuming that I need a yield of 9% before I would consider investing, the stock price has to fall to $1. I shudder at the damage to investors if it reaches that level.
Final thoughts
The telco industry is under assault from all sorts of competitor pressures. SingTel and Starhub investors are feeling it too. Given the uncertainties and challenges with Starhub, I’ll need a much larger margin of safety before investing.
This post was written with reference to the following sources:
FY2018 earnings announcement
FY2017 Annual Report
Some other companies I’ve written about:
Marriott, IHG and Hilton
Spotify
Activision Blizzard
If you missed my previous post:
4 tax planning tips to consider when filing your taxes
The information presented in this article is for general information and educational purposes only. Please do your own due diligence before deciding to act on the information presented.
I am currently vested in 7,200 shares of SingTel, Starhub’s competitor.
Happy Hunting,
KK
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