Starhub Ltd’s Latest Earnings: What Investors Should Know

Starhub Ltd  (SGX: CC3) reported its fiscal first-quarter earnings on Friday evening. The reporting period was for 1 January 2015 to 31 March 2015.

There are three telecommunications outfits in Singapore and Starhub is the second largest, sandwiched between Singapore Telecommunications Limited (SGX: Z74) (the largest) and M1 Ltd (SGX: B2F).

Starhub has five main business segments, namely, Mobile, Pay TV, Broadband, Fixed Network (the first four are collectively referred to as Services Revenue), and Sale of Equipment (mainly handset sales).

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

You can read about the previous earnings releases from Starhub in here and here.

Financial highlights

Here’s a quick rundown of the telco’s latest financial figures:

  1. Quarterly revenue for Starhub was up 8.1% on a year on year comparison, coming in at $617.9 million. Revenue growth was mainly driven by the sale of handsets.
  2. On the other hand, net profit attributable to shareholders for the quarter fell by 12.4% from a year ago to $73.7 million due to higher operating expenses and lower adoption grants.
  3. With lower net profit comes lower earnings per share (EPS). Starhub’s EPS for the quarter fell by 12.2% from 4.9 cents per share in the first quarter of FY2014 to 4.3 cents per share in the reporting quarter.
  4. In the first quarter, cashflow from operations came in at $50.1 million with capital expenditures clocking in at $96.4 million. This gave Starhub a negative free cash flow of $46.3 million, a drastic decline from the positive free cash flow of $104.5 million a year ago ($171.9 million in operating cash flow and $67.4 million in capital expenditures).
  5. The board of directors proposed an interim dividend of 5 cents per share for the quarter, unchanged from the year before.
  6. As of 31 March 2015, the telecommunications outfit had $224.5 million in cash and equivalents and $687.5 million in debt. Starhub’s balance sheet has weakened compared to a year ago when it had $379.3 million in cash and equivalents and $687.5 million in borrowings.

In short, despite higher revenue, both Starhub’s profit and free cash flow had fallen (the latter has even turned negative). These are issues which are certainly worth keeping an eye on, given the net debt position the telecommunications outfit is maintaining.

Operational highlights

The growth in Starhub’s top-line was driven by a hefty 180.9% increase in Handset Sales which was offset by a 10.8% plunge in Broadband Revenue on a year on year comparison. The rise in Handset Sales led to higher subsidies for smartphones and consequently a lower profit for the quarter.

As the amount of Handset Sales will vary from quarter to quarter, we should keep our eyes on the Services Revenue part of Starhub’s business as it represents a potential source of recurring revenue. For the first quarter, Services Revenue as a whole came in at $540.4 million, which was slightly lower than the first-quarter last year.

Moving into the different parts of Services Revenue, sales from Mobile services for the quarter has inched down from $305.9 million a year ago to $305.4 million. Number of subscribers (of both the pre-paid and post-paid variety) had declined from 2.349 million to 2.147 million mainly due to a lower number of pre-paid customers (pre-paid customer numbers had dropped by nearly a quarter from 1.12 million to 846,000). Churn rate (rate of customers leaving) was a low 0.9%.

Meanwhile, sales from Pay TV rose 2.4% year on year to $96 million as Starhub’s customer base grew by 11,000 to a total of 545,000 subscribers. The telecommunications outfit was able to maintain a 0.7% churn rate as well for the quarter.

Elsewhere, the Fixed Network services revenue inched up by 0.8% to $90.9 million compared to last year’s first quarter. This was driven by higher data and internet revenue.

Finally, lower average revenue per user had led to a 10.8% year on year decline in revenue to $48.1 million at the Broadband services space. Number of customers though, rose from 456,000 to 473,000 while the churn rate actually dipped from 1.0% to 0.8%.

Tan Tong Hai, the Chief Executive Officer of Starhub, gave the following commentary in the earnings release on the reporting quarter:

This quarter, the demand for new smartphones continued to be strong and we took the opportunity to pull ahead our acquisition and retention activities. While this impacted profitability for the quarter, we expect it to contribute positively to our performance subsequently.

Our attractive hubbing bundles continued to yield positive results with good subscriber growth and low churn rates recorded across all lines of business. In particular, our Pay TV witnessed the lowest churn rate ever.”

A quick look ahead

On the outlook for the current fiscal year (2015), the management team expects Starhub’s revenue to grow in the low single digit range. Starhub also expects to incur capital expenditures of around 13% of total revenue. The telco maintained its outlook for an annual cash dividend of 20 cents per share. For some perspective, Starhub had paid an annual dividend of 20 cents per share in 2014.

Foolish summary

At its closing price on Friday of $4.27, Starhub traded at 20.5 times its trailing earnings and has a trailing twelve months dividend yield of 4.7%.

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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.