StarHub Ltd’s Latest Earnings: 2017 Dividend to Be Reduced By 20%

StarHub Ltd  (SGX: CC3) reported its 2016 fourth-quarter and full-year earnings last Friday evening.

As a quick background, StarHub is currently Singapore’s second largest telecommunications outfit, sitting in between M1 Ltd  (SGX:B2F) and 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 earnings in here.

Financial highlights

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

  1. StarHub’s revenue for the fourth quarter increased slightly by 0.2%, coming in at $634.8 million. Service revenue rose 0.7% to $567.1 million compared to the same quarter in 2015. For the full year, StarHub’s total revenue declined by 1.9% to $2.4 billion while service revenue was down 0.3% to $2.2 billion.
  2. For the reporting quarter, net profit attributable to shareholders fell 33.2% year-on-year to $54.0 million. For 2016, net profit was down 8.3% to $341.4 million.
  3. Consequently, StarHub’s diluted earnings per share (EPS) fell 32.6% from 4.6 cents in the fourth quarter of 2015 to 3.1 cents in the reporting quarter. For the full year, StarHub reported 19.7 cents in diluted EPS, down 7.9% from 2015.
  4. For the fourth quarter of 2016, cash flow from operations and capital expenditure came in at $81.0 million and $126.4 million, respectively. This gave StarHub negative free cash flow of $45.4 million, a decline from the positive $19.6 million recorded in the same quarter in 2015. For the whole of 2016, StarHub’s free cash flow fell from $215.7 million in 2015 to $184.0 million.
  5. As of 31 December 2016, the telecommunications outfit had $285.2 million in cash and equivalents and total borrowings of $987.5 million. This is down from a year ago when StarHub had $173.4 million in cash and equivalents and total borrowings of $687.5 million.

When StarHub released its results for the fourth quarter of 2015, it expected to post low single-digit growth in Service revenue in 2016. But, the company had to lower expectations in its 2016 second quarter earnings. With the close of 2016, the telco’s Service revenue ended up at pretty much where it was in 2015, in line with lowered expectation.

As promised, StarHub’s board of directors proposed an interim dividend of $0.05 per share for the fourth quarter of 2016. This will keep 2016’s annual dividend at $0.20 per share, a level unchanged since 2010. Unfortunately, StarHub signalled in its latest earnings that it will reduce its dividend to $0.04 per quarter in 2017, or $0.16 per share for the entire year. This will be a 20% reduction from 2016.

As I noted in a February 2016 article, StarHub had to dip into its cash reserves to fund its dividend for 2015. Ultimately, this was unsustainable. In 2016, the telco’s free cash flow did not improve and its balance sheet took on more debt. In the end, StarHub had to reduce its dividend for 2017.

Operational highlights and future outlook

Sale of equipment fell 4.1% for the fourth quarter of 2016. This segment’s revenue comprises the sale of mobile handsets, which is something that will vary from quarter to quarter. As such, we should keep our eyes on the Service revenue component as it represents the source of recurring revenue for StarHub.

The Mobile segment’s revenue for the reporting quarter was down 0.4% year-on-year, ending at $311.8 million. For 2016, Mobile revenue was $1.21 billion, down 2.2% from 2015.

During the reporting quarter, StarHub picked up 18,000 new pre-paid customers and 14,000 new post-paid customers when compared to the previous sequential quarter. StarHub ended 2016 with 920,000 pre-paid mobile customers and 1.387 million post-paid customers, these are higher from the 862,000 pre-paid customers and 1.325 million post-paid customers seen at end-2015.

The churn rate (rate of customers leaving) for post-paid customers in the Mobile segment was 1.0% in the reporting quarter, up compared to the 0.8% seen in the third quarter of 2016.

Meanwhile, the Pay TV segment’s revenue was $93.9 million for the reporting quarter, down 6.1% from the $100 million recorded in the fourth quarter of 2015. For the full year, Pay TV delivered $377.8 million in revenue, down 3.4% from 2015. StarHub’s Pay TV customer base ended 2016 at 498,000. It shrank by 9,000 compared to the prior quarter and by 38,000 compared to a year ago. Churn rate for the Pay TV segment was 0.9% for the reporting quarter.

For the fourth-quarter of 2016, revenue for the Enterprise Fixed segment rose 9.5% year-on-year to end at $107.2 million. For 2016, revenue was $400 million, up 3.9% from the year before.

Finally, Broadband revenue posted a 3.9% year-on-year increase to $54.2 million for the reporting quarter. For the full year, Broadband revenue was up 8.2% to $216.8 million. The number of broadband customers fell by 3,000 from a year ago to end 2016 at 473,000. The churn rate for Broadband also improved from 1.0% in the previous sequential quarter to 0.9%.

Tan Tong Hai, StarHub’s chief executive, had some comments to share on the company’s 2016 results:

“Despite increased competition, we have registered growth in key areas. Mobile, which accounts for half of our total revenue, showed resiliency as we saw an increase in subscriber base and data revenue. Momentum for our Broadband revenue was maintained and we also witnessed a consistent revenue growth in our Enterprise Fixed business.”

Tan also highlighted StarHub’s focus for the coming year:

“In the New Year, we remain focused on our customer-centric approach to deliver innovative solutions to both our consumer and enterprise customers.”

Beyond StarHub’s aforementioned reduction in quarterly dividends for 2017, the company also expects its Service revenue for the year to be “at about 2016’s level.”

At Friday’s closing share price of $3.00, StarHub trades at 15.2 times trailing earnings and has a trailing dividend yield of 6.7%. If StarHub’s forward dividend guidance of $0.16 per share for 2017 is used, the company’s shares would have a dividend yield of 5.3% at a price of $3.00.

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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.