How I am Positioning Myself for a Reopen of Singapore's Borders

While Covid still rages on, the economic ramifications due to loss of tourism demand is visibly painful to Singapore. Hotels, restaurants and the transportation industries are suffering from a loss in revenue,. Hence in my view, the opening of Singapore borders for the recreational tourist will be in the very near future (by early 2021). This is due to the small and undeveloped domestic tourist segment our country has.

So how am I positioning myself? Below are two investing themes I have:

1.    Air Travel for tourism will resume soon

Yes, this will definitely happen. It is only a matter of when. For this, I think it will be soon (likely 1Q2021). The main beneficiaries are airline stocks and its ancillary services. For me, I am evaluating companies with a low leveraged balance sheet. This is because while air travel will resume, it is unlikely we will see business as usual, but "business is 3/4 as usual". 

I am not thinking of hotels for now because Singapore's hotel business is fragmented with multiple listed companies (Far East, Hong Fok, Hiap Hoe, CDL, Fraser); while the airline component has only a few dominant companies with little competitors (SATS, SIA Engineering, CAO)

2.    GLCs will give dividends at a higher payout ratio

Due to Covid, governments across the world have brought out budget stimulus and run big budget deficits. With the need to refill their coffers, I expect governments to send hints to its GLCs to give more dividends so that it flows into the state's budget revenue. Hence starting from 2022, I expect dividends will resume at "business as usual" rates for GLCs when business has not reached usual levels. While businesses volume will not pick up and hence EPS are lower than pre Covid levels, GLCs will be increasing their payout ratio to help their parent state.

Building on these 2 points, I have started scouting on the SGX for companies that fit the two ideas. I have divested Silverlake Axis as the price has run up to 33 cents. I plan to use the proceeds for deployment into counters which fit the 2 ideas.

<Invested in CAO>

Starhub Woes in the Teleco Space

Starhub 1H2020 financial results was another round of disaster.

Year on Year, Starhub's net profits were down 12%. The main contributing factor to its poor results was the declining ARPU in its post paid customer segment (Starhub's largest business contributor) points to a forever declining rate. ARPU in June 2019 was $40, in March 2020, it fell to $34 and now in June 2020, it is at $30.

This has surprised me as I thought Starhub's decline in revenue would have stopped. However, it seems the rot has continued.

Consumer shift to SIM-only plans

Singapore consumers are still shifting en-mass to SIM-only plans because these plans are cheaper than the old bundled plans. In the SIM-only market, posts paid consumers currently pay as low as $10 up to $25 to have high usage monthly data plans. With Starhub's own MVNO, giga, now charging $10 for post paid customers, Starhub's ARPU is likely to fall to the $20 range by end 2020.

Not only does a SIM-only shift adversely affect Starhub's ARPU, it affects Starhub's business segment in selling equipment and handphones. As evident, sales of equipment has fallen 32% in the period because consumers are no longer buying handphones from Starhub stores but instead directly via the mobile phone makers or on the  e-commerce space.

Projection of Cash Flow

Starhub generated $267.7 mil in operating cash flow for 1H2020. This was a decline of 14% from 1H 2019, which stood at $311.9 mil. 

With further declines in ARPU for mobile and pay TV expected, I estimate Starhub's cash flow generation ability to decline another 10% to $240 mil. Extrapolating this to a full year, one can expect the company to have a cash generation ability of $480 million per year

Intrinsic Valuation of Starhub

 

As a business, it is definite Starhub will not distribute the full $480 million as dividends to shareholders, it needs to pay for interest expense ($42mil), CAPEX of 5G and other infra (approx $250mil), perpetual distribution ($8mil).

This leaves Starhub with about $180 million. As Starhub has a highly leveraged balance sheet with borrowings of $1.2billion. I think it is prudent for Starhub to save 50% of the remaining amount to repay its debts. This leaves $90 million for shareholders or about 5.2 cents dividend.

Starhub has recently declared a 2.5 cents dividend for 1H2020, which is just about there

Assuming a 5.2 cents dividend and 5% yield (to be in line with perpetual shareholder yield), Starhub's intrinsic value is about $1.04.