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.