Review of Starhub - Be Prepared for Another Reduction in Dividends

Starhub has revealed another terrible set of performance. This is because of the declining revenue in Mobile and PayTV segments, as a result, Starhub's cashflow generated for the second half of the year has fallen to only $280 million. This can be seen using a comparsion of the cashflow statements of Q2 and Q4 of FY 2017.

First Half of Starhub Cashflow

Full Year of Starhub cash flow

Declining Deterioration

With zero1 coming on with its unlimited Data Plan at $30 per month, the arrival of virutal telecos are going to affect the profitability (in turn cashflow) of traditional telecos (E.g. Starhub and M1).

In addition, in its PayTV segment, Starhub is facing intense competition from OTT companies such as VIU (which is a subsidiary of Pacific Century, a SGX-listed company). In fact, Pacific Century has reported a growth of user base by 4 times last FY. The cost of VIU membership to watch TV content costs $6/month vis a vis that of Starhub which costs $20+ each month

All these point to a high probability that Starhub's cash flow and in turn dividends are likely to be cut.

How much dividends can Starhub give?

To support a 12 cents dividends, starhub needs to have free cash flow of $208 million.

Based on the outlook of its segments, Starhub is likely only able to generate $570 million on a full year basis. Netting off cash outflows such as:

i) Maintenance Capex - s$290 mil (based on past data)
ii) Income Tax of about s$50 mil
iii) Finance Expense of s$32 mil 
iv) Annual distribution to perpetual holders of s$7.9 mil 
v) Government Grant of $10 million (cash inflow)

Starhub has only about $200.1 million to distribute a sustainable cashflow. That actually means a 10 cents dividend is sustainable. However given that Starhub recently had built its cash reserves from issuing perpetuals, 12 cents dividend is sustainable for a short period. Beyond that, it is up to Starhub's management capability to improve its cash flow generation ability

Terrible Acquisition

In my opinion, the current Starhub management has not been making good use of its cash proceeds for acquisitions. One such purchase was in MM2 Asia, which is producing very little positive cashflow for its shareholders. Only time will tell if I am right about it.

2022 bonds

It is worth noting that Starhub has a $220 million 3.08% bond tranche due in Sep 2022 (4.5 years time). Given that these bonds were issued in 2012, way before Central Banks stopped their QE and shrunk their balance sheet, it is difficult for Starhub to reissue new bonds at such low rates. Since 2012, we have seen 5 rate hikes of 0.25% each, Starhub is likely to need a coupon rate of 5% to roll it over in 2022 - barring another economic recession from now to then. This is going to be another cash burn aspect

Conclusion 

All in all, given the deteriorating conditions, Starhub definitely has to cut its dividends to a sustainable level. As a dividend stock, asking for a 5% yield is acceptable given that its perpetuals is already yielding 3.95% per year. Furthermore, given how much cash burn Starhub has, I feel it is unlikely Starhub will redeem its perps; but instead let it shoot up to 4.95% after 10 years. Hence, a 5% yield demanded by common shareholders is reasonable.

This puts Starhub at a fair value of only about $2.00 to $2.40.