SingTel

[Nick]

Hi Freedom,

Is using total liability / total equity useful for Starhub ? The accounting policy for its merger don't lead to an accurate depiction of their equity in a consolidated basis. Even if we just use this equity, it implies a 1H 2012 ROE of 700% which doesn't make a lot of sense !

I think its better to use FCF as the denominator and based on their FY 2011 figures, they could easily repay their debt with < 1.5 years of FCF. I suspect Singtel figure is no different and probably higher if we include associates and JV leverage.

(Not Vested)

[KopiKat]

took a look at both Singtel & Starhub. I can't understand why Starhub is trading much higher than Singtel. Simply because of higher dividend?

Annualized EPS, Singtel is 24 cents and Starhub is 20 cents.

Leverage(total liability/total eequity), Singtel is < 1 and Starhub is > 50, though the underlying leverage ratio could be higher for Singtel as it has quite substantial associates and joint ventures, but I am sure it is much lower than 50.

Profit margin, it is around the same even with Starhub having much higher leverage.

IMO, Starhub is lucky that the interest rate is so low to allow it to have such leverage. When the interest rate starts to rise, there is not going to be much left for shareholders. Enjoy while the party continues.

After Starhub did a couple of Capital Reduction exercises in '06, their total debts level had been $800Mil to $900Mil from '07 to '10. After that, they'd slowly reduced it to current $600Mil+ with their FCF and govt grants for NBN.

IIRC, on this basis, some analysts (I can only remember CIMB) had been talking about a potential Capital Reduction exercise / Special Div for at least a year now.

Perhaps this is one of the reason?

[freedom]

Hi Freedom,

Is using total liability / total equity useful for Starhub ? The accounting policy for its merger don't lead to an accurate depiction of their equity in a consolidated basis. Even if we just use this equity, it implies a 1H 2012 ROE of 700% which doesn't make a lot of sense !

I think its better to use FCF as the denominator and based on their FY 2011 figures, they could easily repay their debt with < 1.5 years of FCF.

(Not Vested)

my argument is not about whether such high leverage can continue. I am quite sure that it can continue very long as it has been like that for very long.

Though Starhub can operate at such high leverage, it still pays financial expense for virtually all its liabilities. With such high leverage, Starhub's financial result is very sensitive to interest rate. Any interest rate fluctuation will be amplified by virtually its >50 leverage ratio.

The risk is more about whether Starhub can maintain its current dividend for ever rather than whether it can operate like this forever(I am quite confident that it can operate like this very long).

[Nick]

Hi Freedom,

Is using total liability / total equity useful for Starhub ? The accounting policy for its merger don't lead to an accurate depiction of their equity in a consolidated basis. Even if we just use this equity, it implies a 1H 2012 ROE of 700% which doesn't make a lot of sense !

I think its better to use FCF as the denominator and based on their FY 2011 figures, they could easily repay their debt with < 1.5 years of FCF.

(Not Vested)

my argument is not about whether such high leverage can continue. I am quite sure that it can continue very long as it has been like that for very long.

Though Starhub can operate at such high leverage, it still pays financial expense for virtually all its liabilities. With such high leverage, Starhub's financial result is very sensitive to interest rate. Any interest rate fluctuation will be amplified by virtually its >50 leverage ratio.

The risk is more about whether Starhub can maintain its current dividend for ever rather than whether it can operate like this forever(I am quite confident that it can operate like this very long).

I wouldn't consider the leverage to be high. It could easily halt dividend payment for 1 year and retire its debt completely.

FY 2012

FCF: $449 million
Net Debt: $484 million
Net Debt / FCF: 1.08 years

If interest expense increases by 300% (tremendous rise !),

FCF: $386 million
Net Debt: $484 million
Net Debt / FCF: 1.25 years

[freedom]

Hi Freedom,

Is using total liability / total equity useful for Starhub ? The accounting policy for its merger don't lead to an accurate depiction of their equity in a consolidated basis. Even if we just use this equity, it implies a 1H 2012 ROE of 700% which doesn't make a lot of sense !

I think its better to use FCF as the denominator and based on their FY 2011 figures, they could easily repay their debt with < 1.5 years of FCF.

(Not Vested)

my argument is not about whether such high leverage can continue. I am quite sure that it can continue very long as it has been like that for very long.

Though Starhub can operate at such high leverage, it still pays financial expense for virtually all its liabilities. With such high leverage, Starhub's financial result is very sensitive to interest rate. Any interest rate fluctuation will be amplified by virtually its >50 leverage ratio.

The risk is more about whether Starhub can maintain its current dividend for ever rather than whether it can operate like this forever(I am quite confident that it can operate like this very long).

I wouldn't consider the leverage to be high. It could easily halt dividend payment for 1 year and retire its debt completely.

FY 2012

FCF: $449 million
Net Debt: $484 million
Net Debt / FCF: 1.08 years

If interest expense increases by 300% (tremendous rise !),

FCF: $386 million
Net Debt: $484 million
Net Debt / FCF: 1.25 years

exactly, my point. if Starhub halts its dividend, what is going to be its share price?

I am not talking about Starhub as a going concern.

another concern is that if starhub is to repay its debt, it also must repay its payable. Its suppliers will not risk themselves for the creditors and shareholders.

[Nick]

Hi Freedom,

Is using total liability / total equity useful for Starhub ? The accounting policy for its merger don't lead to an accurate depiction of their equity in a consolidated basis. Even if we just use this equity, it implies a 1H 2012 ROE of 700% which doesn't make a lot of sense !

I think its better to use FCF as the denominator and based on their FY 2011 figures, they could easily repay their debt with < 1.5 years of FCF.

(Not Vested)

my argument is not about whether such high leverage can continue. I am quite sure that it can continue very long as it has been like that for very long.

Though Starhub can operate at such high leverage, it still pays financial expense for virtually all its liabilities. With such high leverage, Starhub's financial result is very sensitive to interest rate. Any interest rate fluctuation will be amplified by virtually its >50 leverage ratio.

The risk is more about whether Starhub can maintain its current dividend for ever rather than whether it can operate like this forever(I am quite confident that it can operate like this very long).

I wouldn't consider the leverage to be high. It could easily halt dividend payment for 1 year and retire its debt completely.

FY 2012

FCF: $449 million
Net Debt: $484 million
Net Debt / FCF: 1.08 years

If interest expense increases by 300% (tremendous rise !),

FCF: $386 million
Net Debt: $484 million
Net Debt / FCF: 1.25 years

exactly, my point. if Starhub halts its dividend, what is going to be its share price?

I am not talking about Starhub as a going concern.

another concern is that if starhub is to repay its debt, it also must repay its payable. Its suppliers will not risk themselves for the creditors and shareholders.

I am just pointing out that if Starhub really wished to be debt-free, it could do so rapidly.

A 300% increase in finance expense still give sufficient buffer in the FCF to meet the $343 million needed to finance 20 cents dividend per share. I do not think bankers will call in the loans and interest rates increasing 3 times still give sufficient buffer to the FCF (admittedly based only on FY 2011 figures) so I guess that's why the market is reasonable confident of the 20 cents payout in the future. Granted, these figures are mere extrapolation and are not accurate. But it gives an idea of the strength behind their cash generation.

(Not Vested)

[freedom]

we can't simply view everything statically.

In a situation, Starhub is forced to reduce its debt. Its suppliers will not stand still to risk themselves for its creditors and shareholders. So what would likely happen is that Starhub will further use its available cash flow to pay its suppliers. As the trust between Starhub and its suppliers lowers and the deteriorating financial condition, Starhub's revenue will be hit. Under such circumstance, the shareholders value will badly damaged such that its price probably will fall a lot. Probably, Starhub will increase its equity to please its creditors and suppliers to repair their relationship, which will reduce the dividend permanently.

---

Starhub is not only interest rate sensitive, but highly revenue-sensitive all because of its high leverage.

The balance among its creditors, suppliers and shareholders highly depends on its revenue stability.

Any deterioration of its revenue will cause catastrophic damage. There isn't much maneuver Starhub can do to deal with operation blowout.

just like the BPL saga. such a loss making business causes Starhub to trade below its 2009 level.

[Drizzt]

why would starhub reduce its debt when the interest expense is such a small portion?

i think rev hit is a bigger problem. debt i doubt its a big problem. having said that singtel and m1's portion of debt aint small either.

telcos do enjoy better interest terms i feel.

[Some-one]

took a look at both Singtel & Starhub. I can't understand why Starhub is trading much higher than Singtel. Simply because of higher dividend?

Annualized EPS, Singtel is 24 cents and Starhub is 20 cents.

Leverage(total liability/total eequity), Singtel is < 1 and Starhub is > 50, though the underlying leverage ratio could be higher for Singtel as it has quite substantial associates and joint ventures, but I am sure it is much lower than 50.

Profit margin, it is around the same even with Starhub having much higher leverage.(edit: actually, it does show that Starhub has better operating efficiency than Singtel. My fault.)

IMO, Starhub is lucky that the interest rate is so low to allow it to have such leverage. When the interest rate starts to rise, there is not going to be much left for shareholders. Enjoy while the party continues.

That is exactly the same thing which I have wrote in another forum but it seems like people who are vested in StarHub would defend vigorously their position without seeing the fundamental problem with StarHub. StarHub is trading higher than SingTel due to its dividend policy and if the dividend policy is to discontinue, the share price would drop drastically.

(Not Vested)

[freedom]

I did not look at M1, but for Singtel, its leverage is not high in general. probably less than 1 even including associates and joint ventures' balance sheet.

It seems that Singtel is not aggressively pursuing mobile customers from the other 2 operators. Singtel spent 400 million on BPL to after Starhub's pay-TV with mioTV revenue of 100 million for FY2012, which is crazy. Wonder what will happen if Singtel do this kind of thing to acquire mobile customers. Singtel does have enough financial power to lower its mobile profit margin to after customers from the other 2 operators, but it did not do it. maybe because of regulatory issue?