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StarHub Ltd’s Latest Earnings: Slower Growth Expected

StarHub Ltd  (SGX: CC3) reported its second-quarter earnings yesterday. The reporting period was for 1 April 2016 to 30 June 2016.

As a quick background, StarHub is Singapore’s second largest telecommunications outfit, sitting in between M1 Ltd  (SGX:B2F) and the leader, Singapore Telecommunications Limited  (SGX: Z74). StarHub has five business segments, namely Mobile, Pay TV, Enterprise Fixed, Broadband, and Sale of equipment; the first four are collectively known as Service revenue.

You can read about the results of StarHub’s previous quarter here.

Financial highlights

The following’s a quick take of some of StarHub’s latest financial figures:

  1. Quarterly revenue was down 0.6% year-on-year to $585.7 million.
  2. Service revenue was relatively flat compared to the same quarter a year ago, coming in just 0.1% lower at $553.7 million.
  3. But, net profit attributable to shareholders was up 9.6% year-on-year to $108.6 million.
  4. Consequently, StarHub’s diluted earnings per share (EPS) rose 9% from 5.7 cents in the second-quarter of 2015 to 6.2 cents in the reporting quarter.
  5. Cash flow from operations for the second-quarter of 2016 came in at $185.5 million with capital expenditure clocking in at $48.4 million. This gave StarHub positive free cash flow of around $137.1 million, up 32.9% compared to the $103.1 million that it generated in the same quarter a year ago ($165.5 million in cash flow from operations and $62.4 million in capex).
  6. As of 30 June 2016, the telecommunications outfit had $522.9 million in cash and equivalents with borrowings at $987.5 million. This is an improvement compared to the end of last year when StarHub had $154.6 million in cash and equivalents and borrowings of $687.5 million.

In all, the reporting quarter was almost a replay of the first-quarter of 2016.

StarHub’s service revenue remained flat but profits were up. The telecommunications outfit also recorded strong free cash flow. It is worth noting that StarHub had generated $227 million in free cash flow for the first-half of 2016 and paid out $173 million in dividends. As a comparison, StarHub generated $57 million in free cash flow for the first-half of 2015.

In June 2016, StarHub issued a $300 million 3.55% fixed rate 10-year medium term note which comes due in 2026. In an earlier announcement, StarHub said that the net proceeds will be used for general corporate funding requirements and acquisitions and investments. As a result, borrowings rose to $987.5 million while its cash position increased to $522.9 million.

The board of directors proposed an interim dividend of five cents per share for the quarter, unchanged from the year before. The management team also reiterated its intention to maintain the annual dividend payout at 20 cents per share for 2016.

Operational highlights and a future outlook

StarHub’s top-line fell due to lower handset sales, which was down over 9% year-on-year. Handset sales will vary from quarter to quarter, so we might want to keep our eyes on the Service revenue instead, which is recurring.

StarHub’s Service revenue was flat for the reporting quarter, but it was a different tale for the different segments.

Mobile services revenue was down 1.8% year-on-year, ending at $305.3 million despite picking up more customers. StarHub’s postpaid customers and prepaid customers increased by 51,000 and 23,000, respectively, compared to the second-quarter of 2015. The company ended the reporting quarter with 2.235 million mobile customers. Churn rate (rate of customers leaving) for post-paid customers was 0.9%, unchanged from the previous sequential quarter as well as the same quarter a year ago.

Meanwhile, Pay TV segment sales was about $95 million for the reporting quarter, 2.4% lower than a year ago. StarHub’s Pay TV customer base shrank by 10,000 to 518,000 when compared to the first-quarter of 2016. Notably, Starhub’s Pay TV segment has lost a total of 27,000 customers in the last four quarters, a development worth watching. Pay TV churn rate ticked up to 1.0% for the reporting quarter, compared to the 0.8% reported in the previous quarter and in the second-quarter of 2015.

For the second-quarter of 2016, the Enterprise Fixed services segment’s revenue rose by 1.9% year-on-year to $98.6 million.

Elsewhere, Broadband services revenue saw an 11% increase to $54.4 million. The number of broadband customers was flat quarter-on-quarter at 473,000 customers but down by 2,000 compared to the second-quarter of 2015. Average revenue per user (ARPU) rose from $33 in the second-quarter last year to $37 in the reporting quarter. Churn rate for broadband ticked up to 1.2%, up from 1.1% sequentially and 0.9% from a year ago.

Tan Tong Hai, StarHub’s Chief Executive Officer, added commentary on the current quarter’s results:

“We are pleased to note that our residential Broadband revenue has continued to grow for six consecutive quarters. We are also heartened to see continued growth in our total Mobile customer base, contributed not only by the sustained increase in our postpaid Mobile base but also by our pre-paid base.

Our Enterprise Fixed services are now the second largest revenue contributor, in line with our strategy to accelerate our growth in the Enterprise segment.”

The company also revised its outlook for the year:

“Based on the current outlook, we revised the Group’s 2016 service revenue to be at about 2015’s level and Group EBITDA margin at about 32% of service revenue. We expect our CAPEX payments to be about 13% of our total revenue, excluding the spectrum payment due in 2016. For 2016, we intend to maintain our annual cash dividend of 20 cents per ordinary share.”

StarHub’s previous outlook given in the first-quarter of 2016 called for service revenue “to grow in the low single digit range and Group EBITDA margin [to be] at about 31% of service revenue.”

At the market close yesterday, StarHub’s shares were exchanging hands at $3.88 each. StarHub traded at 17 times trailing earnings at that price with a trailing dividend yield of 5.2%.

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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.