Is StarHub Ltd A Bargain Right Now?

Local telco StarHub Ltd (SGX: CC3) has seen its stock price fall by around 40% from an all-time high of S$4.73 on May 2013 to S$2.84 today. Would the company be a bargain at the current price?

There is no easy answer, but we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street.

Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up an incredible annualised return of 29%. In One Up On Wall Street, Lynch wrote about a general checklist he had used when he was searching for investing opportunities. Let’s run StarHub through the checklist and see what turns up.

1. The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

Right now, StarHub has a PE ratio of 17.1. The chart below shows the telco’s PE ratio over the past five years, and you can see that the company’s current valuation multiple is at the middle of where the measure has been for the timeframe under observation. This suggests that StarHub’s PE is neither high nor low right now.

Source: S&P Global Market Intelligence

Meanwhile, StarHub’s local peers, Singapore Telecommunications Limited (SGX: Z74) and M1 Ltd (SGX: B2F), have trailing PE ratios of around 17 (after adjusting for a one-off gain from the spin-off of NetLink NBN Trust (SGX: CJLU)) and 12.6, respectively. These numbers again suggest that StarHub’s PE is neither high nor low.

2. What is the percentage of institutional ownership? The lower the better.

This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.

In the case of StarHub, as of 22 February 2017, the telco counted Temasek Holdings as its largest shareholder with a 56.54% stake. Temasek is one of the Singapore government’s investment arms and is in fact, one of the largest sovereign wealth funds in the world.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

Over the past six months, there have been no instances of insider buying, or the company repurchasing shares.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Here’s a record of StarHub’s earnings over the past decade from 2006 to 2016:

Source: S&P Global Market Intelligence

It turns out that StarHub has been consistently profitable for a long period of time. But, it’s also striking that there has hardly been any growth. The telco’s earnings per share in 2016 was just 12% higher than in 2006.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 30 September 2017, StarHub had S$454.3 million in cash and equivalents, and S$977.5 million in total debt. This leaves a net debt position of S$523.2 million. But for a telco that has generated S$253 million in free cash flow in the first nine months of 2017, a net debt position of S$523.2 million seems very reasonable.

A Final take

On the positive side, StarHub has a good record in generating profits, and a strong balance sheet. The negatives are a PE ratio that’s lukewarm, a high level of institutional ownership, a lack of buybacks and insider buying, and a lack of consistent growth in profits.

Judging from the results of the checklist, Lynch probably would not be too interested in StarHub at current prices. But, it’s worth noting that Lynch’s checklist, as useful as it may be, should only be seen as a useful starting point for further research.

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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 Chong Ser Jing doesn't own shares in any companies mentioned.