Starhub is one of the best perfomers in my portfolio, and I continue to like the counter. I bought the counter again last Friday as it was down around 4% from the week's high but my belief is the long-term uptrend is still intact.
Bought into Starhub when it was in the low $2s, and with dividend of 5 cents a quarter, or 20 cents a year, dividend yield was as high as 9% per annum! A lot of people have expressed skepticism that Starhub is unable to sustain dividends at that level; however if they were to cut dividends it would still be at least 16 cents per year (previous dividends were 18 cents a year) and at current prices it is still a respectable 6% every year, much higher than the inflation rate.
The stock would go ex-dividend on 23 Nov, which means I will get my 5 cents a share for the new lots that I purchased; of course the stock may drop below the price of the dividend (i.e. by more than 5 cents per share due to general weak market sentiment), and if so I may look to adding to my holdings by buying more shares (I guess I have to thank Fundsupermart for this, for making me realise my losses in my fund investments so as to make money in stocks!).
Is dividends of 20 cents a year sustainable for Starhub?
This is anybody's guess, but we can make an educated guess here by referring to the financial statements. The share capital for Starhub is 1.724 million ordinary shares.
So you ask - for 3Q 2010, Starhub earned only 4.76 cents (diluted) per share, how come they are able to pay out 5 cents per share to shareholders? Are they borrowing to pay us - if so, this is dangerous. Now this is where there is a difference between accounting earnings and cash earnings - the biggest non-cash expense is depreciation and if I add back to earnings, the cash earnings now become 85 cents per share. The quarterly depreciation is approx. $65 million, while dividends is $86 million, so the depreciation expense is able to pay off about 75% of the dividends.
Another thing you should look at is shareholder's equity - or net assets - which at S$53.6 million (around $31/share) is rather low. Compare this against its net current liabilities position of $499 million - over 9 times its equity position! What this means is if its trade creditors ask for money immediately, or if the banks do not rollover the loans upon maturity, Starhub may run into cashflow issues. The mitigating factor is that the operating cash flows are sufficient to cover off the cash flows required for financing activities (which includes repayment of loans and payment of dividends) so cash flow management seems alright for now.
Analysis of Revenue Drivers
Not sure if anyone realises, but Starhub's 3Q 2010 results were better than expected. Operating revenue has increased 3% y-o-y due to higher service revenue driven by its Mobile business. There is an 8% y-o-y increase in Mobile service revenues which is largely due to higher subscription revenue from post-paid mobile services, perhaps due to the introduction of iPhones to its customers (where people upgrade their plans - I did too!) - and this is in my opinion the bread and butter of telecommunications business so it is fairly stable.
And as widely expected, Pay TV recorded a 8% lower renuve y-o-y due to a reduction in the Sports package subscription price from $25/month to $12/month as they try to retain customers after they lost the EPL broadcasting rights. The good thing is, Mobile contributes to 54% of total service revenue while Pay TV contributes 17% so overall the entire company is better off.
Revenues are of course only one aspect of earnings, and we should look at operating expenses as well. There is a whopping 57% increase for the 9 months to 2010 y-o-y for cost of equipment sold, and total cost of sales increased by 17%. This is due largely to the subsidy they provided on the iPhones and other smartphones. Is this a concern? Well, the results are translated into higher service revenues for Mobile, and overall would expect there to be margin recovery in 2011, so while increases in expenses are not ideal, this should be monitored by looking at the profitability in subsequent quarters. Again this could be an accounting peculiarity where the expenses (e.g. cost of iPhones) are recorded in the quarter, but revenues are only going to be recognised slowly over the term of the contract (e.g. a two-year mobile service contract).
Therefore I think Starhub is still on track to pay 5 cents per quarter for at least the next 2-3 quarters ahead. It also offers one of the fastest payment of dividends from ex-dividend date, and you will see the dividends in your account by 8-9 Dec, just in time for your Christmas shopping!
Conclusion
Expect Starhub to outperform, at least perform in line with the broader market. The closing price on 19 Nov is 61.8% of the Fibonacci line (from the peak of $2.82) and expect the price range to be around $2.64-2.67 ex-dividend. If it falls back to $2.50-$2.60 believe there is a buying opportunity; alternatively if it shoots up to $3, I may look to offload some of the lots to take profit. Uptrend based on moving averages look intact; so this could happen just before year-end. :)
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