Starhub

[Nick]

hi guys,

Currently SH trades at a PE ratio of 18.65. Owner Earnings (Reported Earnings + Depreciation, Amortization & Other Non Cash Items - Capital Expenditures), which is similar to Free Cash Flow was 250.3 Million in 2010.

With its market cap of roughly 5 billion, it gives it a Price/Owner Earnings Ratio of about 20.

What I find more disturbing is that Starhub paid out 343.1 Million in dividends in 2010. It earned 4 & 4.54 cents per share in the first and second quarter this year, yet paid out 5 cents per share in dividends.

[Not vested in Starhub]

I think your figures for the FCF is incorrect. According to their FY 2010 Statement, FCF stood at $397.5 million (2009: $461 million). FCF for 1H 2011 is reported to be $271.9 million. The proposed FY dividend of 20 cents works out to $343 million based on the share float of 1,716 million shares. In other words, I don't see how their dividend exceeds their FCF (or Owner's Earnings) ?

(Not Vested)

[juno.tay]

hi guys,

Currently SH trades at a PE ratio of 18.65. Owner Earnings (Reported Earnings + Depreciation, Amortization & Other Non Cash Items - Capital Expenditures), which is similar to Free Cash Flow was 250.3 Million in 2010.

With its market cap of roughly 5 billion, it gives it a Price/Owner Earnings Ratio of about 20.

What I find more disturbing is that Starhub paid out 343.1 Million in dividends in 2010. It earned 4 & 4.54 cents per share in the first and second quarter this year, yet paid out 5 cents per share in dividends.

[Not vested in Starhub]

I think your figures for the FCF is incorrect. According to their FY 2010 Statement, FCF stood at $397.5 million (2009: $461 million). FCF for 1H 2011 is reported to be $271.9 million. The proposed FY dividend of 20 cents works out to $343 million based on the share float of 1,716 million shares. In other words, I don't see how their dividend exceeds their FCF (or Owner's Earnings) ?

(Not Vested)

Hi there!

You're right in saying that for FY 2010, Free Cash Flow did indeed exceed the dividend payout.

However, owners Earnings is slightly different from Free Cash Flow which accounts for the difference in figures.

OE doesn't take into account certain figures such as changes in working capital whereas FCF does which leads to the difference in figures.

Hope that clears up the confusion.

PS: I am using the figures from the Annual Report 2010.

[Gregg]

StarHub Q3 net profit falls 7.6 pct as costs rise
http://www.reuters.com/article/idUSL4E7M91I620111109

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Another great result.

-Flat Revenue growth
-Net profit slipped but FCF increased to $148ml vs Q2 2011 ($139.5mil) and Q3 2010 ($78.4mil)
-Debt repayment~100mil, net debt / Ebitda at 0.7x
-Dividend maintain@ $0.05/Qtr

[Musicwhiz]

The Straits Times
Nov 10, 2011
StarHub Q3 profits dip with more smartphone subsidies

By Irene Tham

HIGHER operating expenses offset robust earnings from mobile phones to drive down StarHub's third-quarter net profit by 7.6 per cent to $75.8 million.

Total operating expenses at $479.4 million for the three months to Sept 30 were 7 per cent higher year-on-year due largely to increased smartphone subsidies.

Operating revenue rose 3.6 per cent to $572.2 million, buoyed by mobile and broadband services and handset sale business. Revenue from the mobile services cash cow rose 3 per cent to $307.4 million, thanks to a higher take-up of data subscription plans.

Singapore's No. 2 telco had 2.17 million mobile subscribers as at Sept 30.

Gains in the post-paid segment were offset by a decline in its prepaid business due to fewer migrant workers, said chief executive Neil Montefiore at a conference call yesterday.

Broadband revenue in the quarter grew 3.3 per cent year on year to $60.2 million. The firm added 7,000 broadband customers, bringing the total to 438,000 as at Sept 30. This includes cable and fibre broadband users.

But fibre broadband take-up in the corporate sector has been 'disappointing', said Mr Montefiore, due to delays in service activation and an uncertainty as to when connection would take place.

This caused corporate customers problems because it left them unsure when to terminate their old broadband contracts.

Pay-TV revenue rose 1 per cent to $93.4 million despite reduced pricing for its Sports group package and an expected fall from 2010 when it had the World Cup as an attraction.

It lost 2,000 subscribers bringing its total customer base to 542,000. The telco increased its monthly pay-TV subscription fee by $2 in August this year.

In September, StarHub struck a multi-year renewal deal with Fox International Channels, the first major renewal of content contracts since the Government's controversial cross-carriage ruling requiring pay-TV operators to share their exclusive programming with rivals.

StarHub said it did not see a significant reduction in cost. 'Content providers expect to be paid more whether or not content is exclusive,' said Mr Montefiore.

Its wholesale data and Internet services business also dipped 4 per cent to $68.8 million due to competitive pricing pressure in the local and international leased-circuit market.

Mr Montefiore said the group's operating revenue for the year is expected to be in the low single-digit range. It is maintaining its quarterly dividend payout of five cents a share. Earnings per share for the quarter were 4.39 cents, down from 4.76 cents a year ago, while net asset value per share was 65.3 cents, down from 70.4 cents in December last year.

StarHub's shares closed down two cents at $2.86 yesterday.

[violinist]

Tummysick offload all 7% to Qatar!

[Drizzt]

wow that is a good sell. wonder who got the better deal. i reckon its Qatar

[D123]

Hi all,

I recently looked at Silverlake Axis's financial statements due to prompting by another forum member (mrEngineer) and after looking through it, went back and looked at StarHub's figures as well. It seems that both have the "strange" case of the parent company's net assets being higher than that of the consolidated group. As it is, my understanding tells me that when assessing an overall company's performance, we should primarily pay attention to the group figures rather than the company figures. That has not changed. But after looking at StarHub and Silverlake Axis, I realized that in certain cases, the company figures can give useful insights as well.

Both StarHub and Silverlake Axis have lopsided balance sheets where the company's net assets are larger than the group assets. This is predominantly due to their adoption of "pooling-of-interests" method of accounting for acquisitions and the subsequent consolidated figures. This accounting method leads to no record of goodwill and a mere adding up of assets and liabilities, and the adjustment of the net assets account to balance the numbers, and reflect the new shares issued by the parent company.

So what does this mean for StarHub? Here are my thoughts:

1. High leverage
As of 3Q2011, debt-to-equity ratio is 4.77 times or 477%, and liabilities-to-equity ratio is 12 times or about 12000%. This is derived using debt, total liabilities and total net asset figures from the group accounts. No criss-crossing of group and company figures.

2. High interest coverage
Does this mean that the group has an unsustainable level of debt? Not really. If you look at the records of both profit before interest and taxes, as well as free cash flow before interest and taxes, their coverage of interest payments have been in double digits (teens and twenties) since 2005. Apart from the large amounts of cash spewed from their operations, this relatively high interest coverage is derived from the low interest that they are charged on their debt. The following are the ranges of floating rates they have paid on their debt since 2004.

2004: 1.46% to 2.43%
2005: 1.93% to 4.16%
2006: 3.92% to 4.01%
2007: 2.97% to 3.33%
2008: 1.24% to 2.13%
2009: 0.92% to 1.39%
2010: 0.44% to 1.48%

3. Is StarHub going to be bankrupt?
Again, not really. Technically, if their group net assets account goes negative, they can be branded as technically insolvent. But that doesn't mean that they are going to be bankrupt. The balance sheet is now quite well sustained by payables and debt, and the creditors are not likely to call for a liquidation of the company even if net assets hit slightly negative. First, the assets are a cash cow, and it's probably better to earn the interest on the debt issued. Secondly, what are you going to do frankly, with underground cables and other infrastructure if you're a bank? It might also be the case where certain assets are worth more than their stated book values since the cash flow generation ability is so strong.

Also, when you, as a company with strong cash flows, have a majority shareholder, who happens to be the major or significant shareholder in scores of banks around the world, would you really be worried about funding?

4. Hidden negative retained earnings in subsidiary
Like some others have pointed out in this forum, I also believe that the main reason for the small net asset figure on the group accounts is mainly due to the consolidation of a subsidiary with a large negative net asset account, or subsidiaries with negative net asset accounts. And the negative figures probably stem from the retained earnings account where the disparity is so huge (about S$500M-S$600M).

5. So why does the company keep pointing to the company net asset figures and say they can pay dividends?
According to the Company Act of Singapore, dividends can only be paid from profits. This includes all previous undistributed profits retained by the company. As of 3Q2011, group figures for retained earnings are S$28M and company figures are S$582M. Since it is the company that distributes profits, it can still legally pay out S$582M of profits today even if it doesn't make anymore profits. But that is contingent on them finding the cash from its balance sheet to pay.

If you look at the total reserves of the company, it is even larger at S$858M, mainly due to the merger reserve of about S$278M. So here, you can also find an extra S$278M that can be taken out of the company and distributed to shareholders in the form of capital reductions.

So ultimately, management is right in steering shareholders to the company figures and saying that they have another S$800M+ of reserves that backstops its ongoing dividend payments. But the legal option to disburse cash to shareholders does not mean the economic option to do so. Looking back at the group balance sheet, the company is near technical insolvency, has a low current ratio of about 0.5 to 0.6, and is in a net debt position. In short, it does not have the cash to back up the reserves. The only way they can pay future dividends is through future cash flows. As long as the parent company can earn profits, and its subsidiaries can pay the parent company dividends for the parent company to pay out to its shareholders, StarHub shareholders should be able to receive dividends. The other way to find cash for distribution is to do what they did in 2006 and 2007, borrow and leverage up the company.

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Ultimately, I think those concerned about future cash flows need to pay attention to two areas.

Firstly, are the cash flows going to be sustainable and substantial? Here, my initial impression is yes. Not because they have the better mobile plans, or their cable network is better etc. The main reason is that the local telco sector is a comfortable oligopoly, and the company shares the same majority shareholder with its primary competitor.

Secondly, will the debt structure hold? Again, I would argue yes, since the majority shareholder has vast resources on hand to support it so, and there are economic reasons for creditors to lend.

[Nick]

Starhub total debt stands at $648.3 million and it have $223.3 mil cash as of 3Q 2011. It generated FCF of $420.3 million in 9M 2011. It would seem that Starhub could have easily suspended their dividend payout for 1 year and use their cash-flow to pay their debt and be a debt-free telco. So I don't think debt is an issue here.

(Not Vested)

[D123]

Hi Nick,

I'm not sure what you mean by the debt not being an issue. I think if a company's capital structure is unsustainable in the sense that the debt needs to be paid off using future cash flows at some point, then it is a valid concern. Your intrinsic value calculation will then have to minus off this debt liability.

Having said that, I do think StarHub's debts are not a big concern since cash flows are strong enough to cover interest payments. As shown by the low interest rates they pay year after year, a substantial amount of which is on short term debt, their creditors seem to think so too. So my conclusion is, the debt is not a big concern since the capital structure is still quite sound. But should my assumption that capital structure is sound and sustainable be wrong, then the debt would affect my calculation of the company's intrinsic value.

We can also look at it from a portfolio management point of view. Let's say you are structuring an investment portfolio, and you need a certain amount of cash flow from your portfolio returns, say 1% of a targeted 8% return, and you buy StarHub thinking it can contribute to this 1% of cash flows. I don't think you would be very happy if the company's dividends are disrupted for one year.

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P.S. note that when calculating StarHub's FCF, you need to account for taxes and interest payments, which are not captured in CFO or CFI. My estimates for FCF, while still high, are slightly lower than your figure.

[Gregg]

Anyone has information regarding startuh capital expenditure on LTE as I have keep seeing Singtel always talk about LTE.....