Wednesday 17 February 2016

Is Starhub a buy for its dividends?

Starhub is the second largest telecommunications company in Singapore. It is part of the 30 components stocks of the STI and a crowd favorite due to its stable business that produces good cash flow. Starhub has committed to reward shareholders an annual dividend of 20 cents in 2016.

Sustainability of its 20 cents Dividends

Dividends are only sustainable if they are paid from cash flow. Hence, it is apt we start with the cash flow statement. Firstly, lets remember Starhub needs to generate $346 Mil of cash to deliver its 20 cents dividends.

From its latest full year results, Starhub has generated about s$674 Million from operating cashflow before changes in working capital and spent about 320 Mil in maintenance CAPEX (approximated from its past few years capex spending). Doing further approximations, we can roughly gauge Starhub has to annually pay cash interest expense of 20 Mil, taxes of 65mil and will receive 30 mil from government grants. This leaves Starhub with about $300 Mil to distribute as dividends.

While its 173 mil cash hoard will support 2016 dividends, it seems hard for Starhub to sustain its dividends in the long run given the cash gap.

High debts

It is interesting to learn Starhub has one of the highest debt to equity ratio on the SGX. The number stands at 9x. Closer inspection of its liabilities, one can see that it contains about s$687.5 mil in borrowings.

Starhub's FY15 Balance Sheet

A worrying sign is that Starhub has not been paying down its borrowings, but only the interest. Furthermore Starhub has a 220 mil bond due in Sept 2022, which I think will unlikely to be rolled over at the low rate of 3.08% given a rising interest rate environment.

It will be good if Starhub takes the initiative to pay off debts or accumulate cash now to redeem the 220 mil bonds because it will reduce interest expense. This will improve the sustainability of its dividends in the long run, in light of a rising interest environment.

How to value?

So it seems Starhub is might not sustain its 20 cents dividends from a cash flow analysis (even when it is not paying down its debt principal amount). From the current results of $300 mil cash generated, lower dividends may be expected. 

With all this information, what do readers think of Starhub's true valuation as a dividend stock?

Monday 1 February 2016

Portfolio update- Investing in TTJ and BBR

I have made additions to both TTJ and BBR. The investment thesis is simple: to invest in companies which will benefit from the Singapore government's infrastructural plan. Given the gloomy outlook of our economy, it is likely our government will commence on some form of expansionary fiscal policy to sustain growth. The most evident way is through infrastructural projects. From BCA's outlook, 2016 construction industry is likely to be about 27 to 32 Billion (2015 was 27.2 Billion). BUT with about 65% driven by the public sector.

We have a few underground MRT lines and depot which will start construction. Hence companies like TTJ and Yongnam are likely to benefit. TTJ was chosen over Yongnam because of my view that TTJ has a better management as evident by the business's strong cash flow generation and little leverage. For the lastest FY, TTJ was able to generate approx 8 cents per share in free cash flow, giving it a P/FCF of 3.25 times.

Similarly, I too am interested in companies that does general construction work for the public sector. Two names stood out - BBR and KSH. Both companies does a significant amount of government projects and have exposure to both the construction and property development. BBR was chosen in the end for its less exposure to the property development business which I am not sanguine about. 

It is likely for both companies I will attempt to add more stakes at current prices. However, given their low liquidity, it will be a slow process. I too am monitoring OKP which does road and drainage infrastructural projects, however, its current price is a tad too high for me. Lastly, I have added a few more lots in FSL trust.