Would Benjamin Graham Buy StarHub?

StarHub (SGX: CC3), which is a constituent of Singapore’s Straits Times Index (SGX: ^STI) and also the country’s second largest telecommunications company, currently accounts for around one-third of the local mobile phone market.

The company has a generous dividend policy that has seen its dividend increase or at least maintained since 2005. With low interest rates around the world still distorting bond markets, the dividend yield on offer from StarHub, which currently stands at 4.8%, is double the yield of the 2.4% that is available on high-grade bonds.

Along with a similarly attractive earnings yield of around 5%, it would appear that StarHub is not too expensive in terms of the rewards on offer that value investors might seek.

However, StarHub is a highly leveraged company and the risks involved when investing in such a company is the factor that is most likely to deter a value investor such as Benjamin Graham.

At the current stock price, StarHub is valued at 75 times book value and around 12 times the value of the company’s current assets. These multiples are some way off the value of two-thirds that Benjamin Graham traditionally sought.

StarHub’s current debt, which is close to S$700 million, dwarfs the book value of just under S$100 million. It implies that an investment in StarHub could carry substantial risk.

Similarly, the current ratio, which is the current assets divided by the current liabilities, stands at 0.6. It is also some distance away from the desired value of two. It suggests that StarHub’s current assets do not cover its current liabilities.

Some might argue that the reliable and predictable cash flows that companies such as StarHub enjoys could allow it to take on larger debts. Additionally, in recent times, companies with large amounts of debt on their books have benefited from very low interest rates.

However, it is questionable as to how long interest rates could stay low, which then raises the next question as to when onerous debts could start to become a real burden.

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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 Adam Kuo doesn’t own shares in any companies mentioned.