Monday, August 26, 2019

Why I Think Starhub Is Going Down To $1

I took up a pretty substantial short position for Starhub today at a price of $1.35.

Starhub Limited is no stranger to most Singaporeans, as we probably use their services one way or another.

At the peak of their share price, Starhub was trading at $4.13 back in 2014, but have since seen declining numbers to end the day where they are today at $1.34 due to massive competitions, evolving technology and erosion of quality services that it can offer to customers.

Business Divisions

Mobile Service Revenue fell 10% year on year due to the entry of competitions from the MVNOs across all segments of data usage, voice and IDD services. However, there are brighter scenes in the post-paid customer base numbers as they managed to grow this segment by 7% year on year. Prepaid numbers are down by 11% as customers tend to switch from one to post-paid.

Pay TV numbers continued to struggle as they lost 20,000 subscribers in 2019 while the ARPU dropped 17% year on year.

On the enterprise business, cyber-security managed to outperform by growing by 92% for the first half, but this contributes barely 7% of the Group's overall revenue figures. Furthermore, they have agreed to also sell their cryptographic stake to Temasek, which now means going forward they will only own 60% stake through Ensign. 

Further Dividend Cuts Imminent

In the earlier days of 2019, the Group made a decision to revise their dividend payout policy from a fixed 16 cents to a variable policy of paying out at least 80% of their net attributable profits for FY2019.

The Group committed nevertheless for a 9 cents dividend for FY2019, which translated to about $155m based on their total outstanding shares.

If we look closely at the numbers, that's not looking great.

While net profits attributable to shareholder for 1H FY19 numbers amounted to $93.5m, free cash flow numbers fell to $75.9m for the first half of the year. If we annualized the cashflow, that's $150m, which is barely the numbers needed to sustain their 9 cents dividends, give or take.

For them to maintain this kind of payout at 9 cents, their business earnings would have to sustain at the current level and capex has to be minimal like they did in the first half. Already, the management has guided for capex for 2019 (excluding spectrum) to be in the range of 11% to 12% of their total revenue in 2019. Working backwards, this means 11% x annualized $2,300m = $253m capex for FY2019. They already spent $116m capex in 1H, so I'm expecting 2H capex to be at around $137m.

Don't forget we have not included the 4G spectrum capex which they have to incur an additional $282m which they have committed. 

Why I Think There Are More Rooms To Fall?

What do you get when a company has a declining business division, erosion of margins due to competitions, depleting cash balance (cash and cash equivalent at $97.5m, net debt position of $930.2m, total outstanding capex commitments at $443.8m, including the commitments for 4G spectrum rights of $282m that have yet to be incurred)?

The probable likelihood scenarios are either more borrowings (keep tapping on those while it lasts), equity rights call, or further dividend cuts, or all of the three combined together at the worst scenarios.

In order to "grow" their business and maintain its competitiveness, they will need to spend on capex, like they did with their pay tv business when they introduced brand new TV passes in order to cater to customer's preference of moving to fibre tv content.

Where the world is already moving into the possibility of a 5G network, Starhub is still lingering around 4G. I wonder whats the capex going to be like for 5G should Starhub eventually go into this route. 

Will Starhub Goes To $1?

It's incredibly difficult to call for the bottom when you have companies that are still in the midst of the decline and are shifting model to cater the needs of the new world. It doesn't help also to know that the company's balance sheet have already deteriorated when the fight is not yet over (Knock, knock TPG, when will you arrive?).

While it's a long way from here before it goes to $1, a couple of bad results followed by a further cut in dividends might be the last straw for investors to run. 

On the dividends front, an eventual cut to 7 cents/share dividends, which translates to 7% yield for investors at $1, would be more sustainable moving forward. 

The 7 cents/shares would require the company to fork out $121m, which if based on 80% payout, would require the company to earn a profit of $151m.

It would mean a further drop of around 19.2% from where they are today or a terminal growth of negative 3.5% over the next 5 years but it will not be a surprise if it comes to that stage in the next one or two years.

Combine this with where we are on the global trade war and we might just see a perfect storm brewing for this company.

Thanks for reading.

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  1. Hello, can i ask if you are using CFD to short?

  2. Why CFD shot is better then normal shot?

    1. It is Short.
      CFD short you can hold by paying service fee. normal short i assume you are referring to naked short, you will have to buy back before market close

  3. Who we are betting against with CFD?

    1. Hi Temperament

      Most of the brokerage they are market makers themselves so they look around for folks who are willing to borrow their shares.

  4. Kudos, I think you make a very compelling case to go short. Indeed, given the consecutive history of a declining earnings base along with falling dividends, there is a strong likelihood that dividends could be cut moving forward, and a 7 cent DPS looks more sustainable.

    However, I have a slightly more conservative TP of S$1.17 which translates to a dividend yield of 6%. My primarily reasoning is that the bigger player, SingTel is currently yielding 5.5% and historically the average dividend yield ratio between the two is about 1.1 (10%).

    While earnings are declining, given the economic environment which turns investors to be more defensive and seek harbour in the safer stocks, Starhub still resides in the more defensive telecommunications industry. This means that there could be funds cushioning a significant sell off in the short term.

    Lastly, while minor, don't forget that if you go short you will have to cover the dividends and the next record date is in mid-November. To me, I will try to cover before the next record date. Nonetheless, between 1.17 and 1.34 is still a considerable amount of upside given a 2.5 month horizon from now till the next dividend record date.

    Thanks for sharing!

    1. Hi Incantations

      You made superb points which I agreed with you.

      Technically, I don't have a specific target price it all plays out depending on how the development goes. Maybe things would improve from here and if so then my thesis would be a mistake and I wouldn't want to hold on for much longer.

      Also the dividend every quarter is also a "cost" by nature so likely I will have to gauge it against if I believe they have more rooms to fall in terms of performance.

    2. Absolutely... there's a good chance for this quarterly dividend cost to shrink further when they move into the dividend policy based on a payout ratio. Thanks again for sharing this great idea.

  5. Plse bring it to $1. :)

  6. uncle168

    you not scared st telemedia take starhub private?

    ST telemedia got 55%, @ $1.68 the remaining 45% only S$1.3B

    tpg free sim is very lousy i don't think it can complete its network by end 2020

    anyway when it start charging everyone will throw the free sim away then all the 3 telcos will increase price and charge the mvno until they all go bankrupt

    so in the end the government wins all 3 telcos in its pocket

    keppel & sph took my m1 private by force or i buy some more

    i predict sembcorp and st telemedia take starhub private because they know tpg will eventually give up as it has to build 2 network in australia and singapore and australia stuck as merger with vodafone jam and cannot use huawei

    sph also have starhub which it can divest to reduce debt as now it has a lot of m1 leh


  7. uncle168,

    you very good let uncle comment the dividend warrior lock his comment so you can only read the good stuff which blind his greed which will eventually make him bankrupt

    i actually want to warn him a global recession would increase vacancy and reduce rental rates, this would cause all the reits to cut dpu and default on their debt obligations which would trigger a bank meltdown when the gov once again back band deposit with our reserves

    you got read bt so funny the reporter ask dbs going to write off krisenergy debt the bank don't want to reply but insider say no need, then keppel also say no need to repay when it is the guarantor, like that also can? bad debt can stay in bank loan and guarantor no need to repay debtor, what kind of new law is this?



    1. yah some blogger scare ppl go against him. some post are sponsored like lendlease ipo. 2 wrote ridiculous one sided buy call, I totally change my opinion abt them after reading. keekeekee.
      new law written by 70%. anything also can nowadays. keekeekee. :)

  8. If Starhub go to 1, its parent will not sit idle, pse be careful.

    1. Hi iwimaasl

      Seems like you have Insider info there and think starhub is extremely cheap at $1.

      I actually don't think starhub is cheap even at $1 so not sure why you think the parent will bail them out.

  9. i understand when got short squeeze, it means can be a bottomless loss?

    A long position U can only lose your shirt and pants.

    U still have your briefs. Not naked still got hope.

    Don't have the balls to try shorting the market.

    Of course some smart Alec will laugh at me why only fighting the market with only one hand.

    NVM, i doing O.K. and that's my temperament and i think i am not so smart as shortist lol! Or ambidextrous people.

    My logic is such i don't want to pay anyone before i make any money. Because making money from market is already very hard.


  10. Update: Closed my short position this morning at the opening at $1.38, which represents a 3 cents loss for every 1000 shares.

    Starhub reports better top line than what the market (and myself) expected. It appears that the decline has been stabilised if we judged the results based on Q3 alone. Fcf has also performed better than expected which probably surprised the market. Still the capex situation surrounding the 4G spectrum and the upcoming 5G has not been totally resolved yet with their available fcf but I guess the market will roll it on to the next few quarters for further development.

  11. uncle168,

    even if you were right on starhub, the market is irrational

    starhub made more money because of other income from tpg tunnel fees

    without it all its business is dropping to zero

    except the corporate business held up by temasek ownself help ownself cyber security business

    if u want to short don't go near GLCs


    1. Hi Uncle168

      I disagree with your statement.

      I don't think the GLCs have a track record of companies that are doing well. If you look at their historical record it has been well below the average.

      Sure they do have the money they can pump into the company but that's not most until they privatized it at a cheap price leaving most investors who bought higher left with no choice but to give in.

      For starhub specifically, I think the short is worth a shot, I don't think they have solved anything structurally. Going digital takes a long runway and a huge commitment of capex which has not been priced into the market. The shoot up in share price today does not mean they turned into a great business overnight nor implies they have solved the structural issues permanently.

  12. uncle168,

    singapore gov is state capitalism

    they use land sales proceed and the people's pension to control the entire economy

    sla land sales nobody knows how much and not accounted for in the annual budget

    it is estimated to be in the trillions

    so GLCs not well run nevermind what

    there is so much money to burn

    even you come to singapore to burn your money to buy our property which would become worthless when the laws change restricting rental or higher taxation on rental income or change in immigration limits

    do u know in the past only singaporeans can buy hdb flats, pr cannot buy hdb flats and hdb flats cannot be rented out

    but the government changed the rules and hdb flats keep rising since

    if the government change everything changes

    even if u have CPA or CFA also no use one

    my lecturer drives second hand toyota got all sorts of qualification

    he complain the student drive porsche to school as the father rich

    temasek discovered that the only way to stop the valuation of its portfolio from dropping is to privatise the company as private valuation is a black box much like property valuation is not regulated

    that is why the reits bubble is become so huge as nobody controls the property valuation and interest rate is so low

    the day it ends would be catastrophic, trillions would be wiped out especially dividend warrior life savings would be gone :(

    1. I don't understand one thing.

      If you are that negative about the outlook here, why not just migrate elsewhere?

  13. i was born here in bedok

    i tried to buy 2rm punggol bto like dividend warrior but in the end aborted the decision as it would mean leaving my elderly parents in bedok

    unlike u i've served national service which i didn't enjoyed but entrenched a sense of belonging in this country

    my buddy didn't like ns but we served anyway

    even if singapore went back to a fishing village i would not abandon my birth country

    this is why i worry for singapore as it easily accept economic immigrants whom would flee at first aight of trouble

  14. uncle168,

    starhub problem is the last ceo tan tong hai

    he comes from singapore computer systems which was eaten by ncs of singtel

    he started the quarterly dividend of 5 cents which depleted the cash of starhub and copy smrt and cut cost by not maintaining its network and kenna fined by imda

    his short sighted strategy boosted his bonus and share price when he was ceo but ran away when tpg came and mobile prices plunged

    he didn't run starhub for the future he squeezed starhub dried and borrow tons of money from the bank to pay dividend

    now starhub is actually dying but i think temasek using would take it private low ball and park it under sembcorp and sph like m1 under keppel and sph

    you see the current ceo is smarter dividend less than eps so reserves would build up quickly to repay the bank loans tan tong hai left behind


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