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?
the equity at the company level shows the true level. the reason for the small equity is because when they purchase scv long time ago, scv was negative equity. the telecom on and off require debts so if they pay it off, it is likely they have to borrow again. Their net debt to ebitda looks very managable, certainly more than FSL trust. most SG telecom and regional telecom have debts, with perhaps some taiwan telecoms and china mobile being the exception.
ReplyDeleteYes, Starhub's debt is manageable. To pay off all its debts, starhub just needs to suspend dividends for 2.5 years and use the fCF to repay debts. If I were the mgmt, I will do just that and 2.5 years later, i am debt free! On the other hand, FSL trust's cashflow is cyclical and it will probably take 4-5 years assuming no dividends is granted to clear all its debts. This is why Starhub is ascribed a higher valuation than FSL across many metrics. As investors, we have to study the risk/reward between the two, consider our own risk profile before deciding which is a better investment for us currently.
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