Saturday, 29 February 2020

Will Starhub maintain its 9 cents Dividend Policy?

Starhub has released is latest financial reports and investors are probably keen to know if starhub's fortune has turned and is its 9 cents dividends sustainable.

ARPU has Stopped Declining

Let's focus on the positives: the first is that ARPU for Starhub's mobile subscribers has stopped. In Dec 18, average revenue per post paid user (ARPU) was $41, it declined to $39 in Sep 19 and then moved to $40 in Dec 19. Based on the other previous quarter results, the decline in ARPU has probably stopped. This is a positive since mobile revenue is the largest contributor to Starhub's business. Its mobile revenue has experienced a slight decline by about 2%

The second positive is the growth in the enterprise business largely due to its recent acquisitions as it can be seen revenue has grown by 10 million, which offsets the negative I am seeing in a certain revenue segment of Starhub's - its PayTV business.

Shrinking PayTV Business

Netflix and Disney streaming services are probably chipping away consumers who used to purchase Starhub's pay TV bundle for their usual entertainment. The decline is still moving in the double digits with recent PayTV revenue falling by 14 million.

Stable Revenue for Now

Thanks to Starhub's recent acquisition strategy, I do expect revenue for FY2020 to be similar to that of FY2019. Given that Starhub's business model allows its revenue to flow down to its cashflow generation easily, a stable revenue also signifies that cashflow generated in Starhub's business should be about the same as this year's. This year the company generated about 621 million before netting off finance and income tax expense, I think this will be the same as the next few years as well.

So let's estimate the potential cashflow generation ability of Starhub.

In its cashflow statement, it seems Starhub has cash outflows of s$230 Million in PPE. This number is rather low from my past data of its PPE spent which ranges about s$290-300 million. It is likely due to the new line in lease liabilites which is recorded as s$60 million cash outflow. The new lease liabilities is a result of accounting method changes in Singapore.

With other cash outflows of s$70 Million in income taxes, s$37.7 million of interest expense and s$7.9 million in perpetuals payment. Starhub is likely to be left with s$215.4 million to give out as dividends. Concidentally, this cashflow genreation projection amount is similar to what I have written in my 2018's coverage of Starhub.

Starhub has bonds due in 2022 and my personal feel is that the company  definitely has to reduce the bond amount because the interest rate environment will not be low forever. With 2-3 years left, it is prudent for it to set aside 100 million tover a 3 year time frame.

This leaves Starhub with about s$180 million for dividends. With its share base of 1.7 billion shares, it seems Starhub can give out a dividend of 10 cents per share. Hence I won't be surprised if the management provides the same dividend guidance policy of "80% of earnings or 2.25 cents per quarter."

Its cashflow generated from its business should be sufficient to support it, even if there is an increase in annual CAPEX in implementing the new 5G network which it is bidding with M1.

Good Dividends but at What Rate?

Considering that Starhub perps are now yielding 3.95% with a potential increase to 4.95% if it is not redeemed within a timeframe, one can reasonably peg Starhub as a 5% dividend yielding machine.

If you are considering Starhub at its current price of $1.50, my feel this is just about right and one can consider it as part of your dividend portfolio.

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