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Tug-Of-Fool: StarHub – The Bear Argument

First off, let’s examine the moat around the business. I must say the moat has been narrowing due to various reasons as discussed below.

StarHub (SGX: CC3) had been the sole pay-tv operator in Singapore until July 2007, when SingTel (SGX: Z74) entered the fray with its Mio TV service.

Kicking off the new season

In 2009, SingTel pulled off a major coup by winning the rights from StarHub to broadcast the Barclays Premier League (BPL) games in Singapore. As shown from the table below, StarHub has been losing customers and revenue for its pay TV subscription since 2009.

Year Households (‘000) Revenue (S$ million)

2007

504

342

2008

524

398

2009

539

405

2010

538

395

2011

545

376

2012

536

396

(Source: StarHub Annual Reports)

With the new cross-carriage rule that is likely to kick in for the new BPL season starting August 2013, StarHub may win back some of its previous customers. But we’ll have to wait and see what happens.

The pay-tv segment is also seeing keen competition from illegal downloads and free online streaming of movies and shows. To counter that, StarHub is producing its own proprietary content such as “Lady First – Singapore” that is less likely to be pirated.

It is noteworthy that StarHub is coming up with new ways to lock in customers but the question begs: How popular are these shows as compared to those overseas content that can be downloaded online for free?

Competitive threat

As for the broadband services segment, more people are going on board the fibre broadband bandwagon, which was launched recently. Since 2011, more companies are springing up offering fibre broadband services to consumers – increasing competition for StarHub. Please refer to the table below.

 

Year Households(‘000) Increase yr-on-yr Revenue (S$ m)
2007 346 7.80% 247
2008 373 7.24% 253
2009 400 5.50% 241
2010 422 4.27% 236
2011 440 0.91% 242
2012 444 249

(Source: StarHub Annual Reports and own calculation)

It can be seen that the percentage increase year-on-year has been falling consistently since 2007 and from 2011 to 2012, this number dipped significantly. It only added 4,000 households in 2012. This can be on the back of increasing competition from its fledgling competitors.

Too much debt

Quantitatively, StarHub’s debt-to-equity ratio is extremely high at 40.6 and the Return-on-Equity is extremely inflated at 826% due to leverage.

The dividend payout ratio is 0.958. This shows that StarHub is paying too much of its profits as dividends and is retaining too little to grow its business.

StarHub is valued at 19 times profit. It is also priced at 50 times its book value. That is not exactly cheap by any measure. By comparison, SingTel is valued at 16 times profit while the price-to-book is also lower at 2.4. In my opinion, SingTel should be trading at a premium to StarHub, since it is a much bigger company.

That concludes the bear argument. You can read the bull argument here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.