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Can Starhub Continue its Winning Run?

Starhub Ltd. (SGX:CC3) has more than doubled over the last five plus years. The share price alone has recorded returns of about 113% from 1 January 2009 to the closing price on 6 November 2014. Over the past five financial years, the telecommunications company has also paid out a hefty total of 65 Singapore cents per share in dividends. By comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was about 78% for the same duration.

While the returns from Starhub has been connecting with success — as Foolish investors, we should look behind the curtains to understand what the business drivers for the move in share price.

A closer look

The Mobile services segment provides the a mobile network with 4G, 3G and 2G services. Next up, the Pay TV services consists of the islandwide HDTV, Internet TV and on-demand services. On the Fixed Network business side, it offers a wide range of data, voice and wholesale services to corporations. Finally, the Broadband services segment covers a broad range of home and business broadband plans along with media rich services like internet protocol television (IPTV).

starhub graph 1

Source: Company Earnigs Presentation; Company Earnings Report

Majority of the revenue for Starhub comes from its Mobile services. For the financial year ended 2013, the Mobile services segment made up 55.4% of total sales. Mobile service is also the largest growth driver revenue in the past five plus years. The next largest sales contributor is Pay TV services at 17.3%, while Broadband services made up 10.8% of revenue in 2013. Fixed Network services contributed 16.5% of sales in 2013, and it another major contributors of revenue growth in the past five plus years. It should be noted that the hardware sales are included in the individual segments above.

We would ideally like to see the revenue dollars drip down to the bottom line.

Starhub does not breakout the services segment profitability, but we can look at the operating cashflow and capital expenditure to gain some insight from the free-cash-flow for the company.

starhub graph 2

Source: Company Earnings Report

The operating cash-flow has been relatively stable despite the rise in revenue. Capital expenditure, though, has been gradually creeping up for the company in the last five years. All in all, the company is solidly free cash flow positive for the past five years.

Finally, Foolish investors would look for the accumulated profits have to end up on the balance sheet in the end. To do this, we look at development of its cash and borrowings.

starhub graph 3

Source: Company Earnings Report

Like most telecommunications companies, Starhub has remained in a net debt position throughout the last five financial years. The debt levels have been decreasing, while the cash and equivalents for the company has been marginally increasing which is a healthy sign. It is worth noting that in September 2012, Starhub issued a $220 million 10-year medium term note (MTN) which carries an interest rate of 3.08% per annum. This MTN is payable in 2022.

A quick look ahead

The Mobile services remains the main revenue contributor. Its customer base grew to 2.35 million in 2013. Additionally, the company has been able to keep its churn rate  (rate of customers leaving Starhub) below a 1%. In contrast, M1 Ltd (SGX:B2F) had 2.1 million mobile customers at the end of 2013. Starhub is also looking at the “Internet of Things” as an opportunity to monetize increased usage of mobile data.

In 2013, Starhub also had 533,000 households subscribing to Pay TV, and 448,000 households with residential broadband. Comparatively, M1 had 85,000 fiber network customers. The average revenue per user (ARPU) for its residential broadband has been trending downwards for Starhub, though, and may continue in 2014.

On the Fixed Network side, Starhub is looking to strengthen its partnerships with Microsoft and Vodafone to offer cloud based solutions to enterprises. The company sees this segment as a growth driver as well.

Perhaps, it is interesting that Starhub was awarded the Media Development Authority’s (MDA) Public Service Broadcast (PSB) Contestable Funds Scheme which allows the company to produce up to 100 hours of PSB content. If done well, this could be an opportunity for Starhub to differentiate its TV content.

Lastly, a new division called i3 (innovation, investment and incubation) was formed in February 2013 to study new forms of service consumptions, new markets and new platforms. Starhub is aware of disruptive entrants into its markets, and this division is a response to possible opportunities (or threats).

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

Starhub represents a stable dividend payer with positive free-cash-flow. The Mobile services, and Fixed Network services might be where its near term growth comes from.  On the flipside, the development of its debt, and free cash flow should be carefully monitored. As it is for any stable dividend payer, obtaining a good share price might be desirable for it to continue to achieve market beating returns.

Individual investors who are interested in the company should continue to study other elements of the company, including executive compensation, insider ownership, its competitive landscape and so forth.

As of the closing price on 6 November 2014 of $4.16, Starhub traded at a price-to-earnings ratio of around 20, and has a dividend yield of around 4.8%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.