Here Are 3 Opportunities and 3 Risks That Starhub Ltd Investors Need To Know

Starhub Ltd (SGX: CC3), the second largest telecommunications company in Singapore that’s sandwiched between Singapore Telecommunications Limited (SGX: Z74) (the largest) and M1 Ltd (SGX: B2F), can be said to be a favourite amongst dividend-investors here.

Not only is the telco’s yield at an attractive 5% now thanks to its annual dividend of S$0.20 per share in 2014, it has also consistently paid a dividend over the past decade. You can see Starhub’s past dividends in the table below and one thing that’s worth noting is that the firm has managed to either maintain or grow its dividends in each year.

Year Starhub’s dividend per share
2005 S$0.090
2006 S$0.115
2007 S$0.160
2008 S$0.180
2009 S$0.190
2010 S$0.20
2011 S$0.20
2012 S$0.20
2013 S$0.20
2014 S$0.20

Source: S&P Capital IQ

But, that is then and this is now. What’s in store next for Starhub? In here, I’d be looking at three growth opportunities that Starhub has in addition to three risks that may derail the company.

Opportunities: The future pot of gold

One thing that Starhub is focusing on is growing its enterprise user base. According to the telco, most of its customers are still individual consumers or households.

Starhub still has a relatively small enterprise user base and it is an area that provides a huge market for the company to tap into. Given that enterprise customers generally produce higher revenues per user and also generates better profit margins, Starhub’s efforts in growing its enterprise user base might be a strong growth engine for the future if it is successful.

Another possible opportunity for Starhub lies in the Internet of Things (IoT). My US colleague Simon Erickson has given a great primer on what the IoT is all about and you can hit this link to find out more.

Returning to a discussion of Starhub’s aspirations with the IoT, my Fool Singapore colleague Chin Hui Leong had this to share:

“[Starhub’s chief executive Tan Tong Hai stated] that Starhub has yet to move strongly into the growing trend of the Internet of Things (IoT) and felt that there will be opportunities there.”

With the growth in IoT devices comes the demand for bandwidth (data collected from IoT devices are often transmitted over wireless or cellular communications networks) and this might provide a tailwind for Starhub given that it’s one of the leading telcos here in Singapore.

The third avenue for growth concerns Singapore’s position as a broadband hub in the region. Most bandwidth traffic moving in and out of the ASEAN region passes through Singapore as a result and this means that Singapore is a natural spot for data storage and the building of data centres.

Starhub, with its well-established infrastructure, could possibly invest in this business segment of facilitating data-traffic flow in and out of Singapore.

Risks: You have been warned

One important risk confronting Starhub is its high leverage; as of 31 March 2015, the company has a net-debt to equity ratio (where net-debt refers to total debt minus total cash) of nearly 200%. The company has had a high leverage ratio for many years now, so it does not seem to be an issue at the moment. But, being highly leveraged would still mean that Starhub does not have much room for error to withstand any negative unexpected shocks to its business.

That being said, there’s a good reason why Starhub’s leverage is so high (and it’s not because management’s being brazen with risk management). According to the telco’s investor relations department:

 “The StarHub Group shareholders’ equity is lower than that at StarHub’s Company level due to the adoption of merger accounting in July 2002 when the shares of Singapore Cable Vision (SCV) were acquired and consolidated into the StarHub Group.

The accounting effect was to effectively write off the goodwill / pre-acquisition losses of SCV against the StarHub Group’s cumulative reserves. The investment in SCV was stated at cost at StarHub’s company level.”

Another big risk confronting Starhub would be the growing popularity of over-the-top (OTT) smartphone applications of which Wechat and Whatsapp are just two examples. These OTT apps are steadily replacing traditional voice-call and SMS services that Starhub’s providing and as these apps get more and more technologically advanced, there’s the chance that Sarhub’s legacy revenue streams will lose relevance with consumers.

The company’s trying to counter such a threat by partnering with a host of OTT applications and bundling their services together with its mobile data plans. But, even that may not be sufficient.

One more area of risk facing Starhub is the possible liberalisation of the telecommunications sector in Singapore. The government has expressed its keenness at having more players compete in the space beyond the current trio of Singtel, Starhub, and M1.

Competition’s heating up and to that point, there are already at least two parties which have expressed their interest in becoming Singapore’s fourth telco; MyRepublic announced its intentions to do so in the middle of last year and OMGTel made waves earlier in 2015 when it announced a partnership with land transport outfit SMRT Corporation Ltd (SGX: S53) with regard to a bid for the fourth telco license.

Stronger competition in the market may drive down prices and profit margins for the industry as a whole and while consumers may benefit, Starhub may not.

Foolish Summary

Starhub has been a strong dividend share over the past decade. There are certainly opportunities available for the company to grow its business, but there are also significant risks which may affect the firm. Investors need to weigh the pros and cons carefully before making an investing decision.

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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 writer Stanley Lim doesn't own shares in any company mentioned.