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Better Buy: Singtel vs. StarHub

With M1 Ltd already privatised, Singapore Telecommunications Limited (SGX: Z74), or Singtel for short, and StarHub Ltd (SGX: CC3) are the two remaining telco companies listed in Singapore. For investors interested in the telco space, which of the two outfits would be the better buy? Let’s check it out.

Scanning the businesses

Singtel is the largest telco in Singapore with a 49% mobile market share, which works out to 4.1 million customers (as of 31 March 2018). On top of doing business in Singapore, it operates in Australia, India, Indonesia, the Philippines, and Thailand. Overall, Singtel boasts over 650 million mobile customers in 21 countries (as of 31 March 2018).

StarHub, on the other hand, operates solely in Singapore and is our country’s second-largest telecommunications company.

Business growth

We will start the comparison with the income statement. This statement, also known as profit and loss statement, shows us how much revenue Singtel and StarHub brought in from the sale of their goods and services, and how much is left after paying all the various overheads needed to run the businesses. The leftover portion is known as net profit or earnings.

Singtel has a fiscal year (FY) that ends on 31 March each year while StarHub’s ends on 31 December every year. The following compares the revenue and net profit growth of the two companies over the last six fiscal years:

  Singtel StarHub
Revenue growth 0.61% 0.02%
Net profit growth -3.26% -11.46%

Source: Company annual reports; author’s compilation

Singtel’s revenue has grown from S$16.85 billion in FY2014 to S$17.37 billion in FY2019, translating to a growth of 0.6% per annum. In comparison, StarHub’s top-line growth was flat from FY2013 to FY2018.

As for the earnings, both Singtel and StarHub saw their bottom-lines fall over the past six fiscal years. However, Singtel performed better than its counterpart in terms of a much smaller percentage decline.

Winner: Singtel

Financial strength

Although revenues and profits are important, they do not tell investors the whole story. For instance, the income statement does not show if a company can survive a prolonged economic crisis. That is where the balance sheet comes into play. It can reveal the health of a company by providing a snapshot of its financial condition.

As of 31 March 2019, Singtel and StarHub’s balance sheet revealed the following:

  Singtel StarHub
Cash and cash equivalents

(S$’ million)

512.7 171.5
Total debt

(S$’ million)

10,664.1 1,028.3
Net-debt-to-equity ratio 34.0% 147.5%

Source: Company earnings reports; author’s compilation

Of the two, Singtel appears to be more conservatively leveraged with a lower net-debt-to-equity ratio of 34%, compared to StarHub’s ratio of above 100%.

Winner: Singtel

Cash is king

Although the income statement shows the amount of profit a company makes every year, this profit does not necessarily translate into the actual cash that flows into a company. To get an accurate picture of the flow of money in and out of a company, we have to look at the statement of cash flows.

In particular, we will zoom into the free cash flow of Singtel and StarHub. Free cash flow (FCF) is cash that the telcos can use to dish out dividends to shareholders, buy back their shares, make acquisitions, strengthen their balance sheet, or reinvest back into their businesses. The following compares the FCF growth of Singtel and StarHub over the last six fiscal years:

  Singtel StarHub
FCF growth 2.4% -13.0%

Source: Company annual reports; author’s compilation

It can be seen that Singtel is better at producing FCF with an annualised growth of 2.4% from FY2014 to FY2019. The metric grew from S$3.25 billion to S$3.65 billion during the same time frame. In comparison, StarHub’s FCF fell from S$291.9 million in FY2013 to S$145.5 million in FY2018.

Winner: Singtel

Dividend growth

Telcos are perceived to be great income shares due to the defensive nature of their businesses. Here, let’s compare the dividend growth at Singtel and StarHub over the past six fiscal years.

  Singtel StarHub
Dividend per share growth 0.8% -4.4%

Source: Company annual reports; author’s compilation

Singtel has increased its dividend per share from 16.8 Singapore cents in FY2014 to 17.5 Singapore cents in FY2019. On the other hand, StarHub’s dividend per share tumbled 4.4% per annum, from 20.0 Singapore cents in FY2013 to 16.0 Singapore cents in FY2018.

Winner: Singtel

Valuations

As investors, we should focus on the value of businesses and not on the daily changes in the share prices. Let’s now compare the price-to-earnings (PE) ratio and dividend yield of the two telcos. The values below are as of the closing prices on 11 June 2019.

  Singtel StarHub
PE ratio 17.4 13.8
Dividend yield 5.3% 9.7%
Share price S$3.29 S$1.47
Market capitalisation S$53.72 billion S$2.55 billion

Source: SGX StockFacts

StarHub has a lower PE ratio and higher dividend yield than Singtel. Income investors should keep in mind that the dividend payout of the two telcos in the coming years could change significantly though.

In its FY2018 annual report, Singtel mentioned that it “expects to maintain its ordinary dividends at 17.5 cents per share for the next two financial years and thereafter revert to the payout ratio of between 60% to 75% of its underlying net profit”.

As for StarHub, from FY2019, it intends to pay out at least 80% of net profit (adjusted for one-off items) as dividends. For the current financial year (FY2019), StarHub plans to pay a total dividend of at least 9.0 Singapore cents per share, divided into 2.25 cents each quarter. Any payment above 9.0 cents corresponding to the new dividend policy would be dished out in the fourth quarter. If adjusted for the 9.0 cents dividend, StarHub’s dividend yield falls to 6.1%.

Winner: StarHub

Connecting the data

Overall, Singtel is the clear winner since it has superior revenue, net profit, and free cash flow growth when compared to StarHub. Singtel’s balance sheet and dividend growth are also stronger than its counterpart. I also like Singtel better than StarHub due to its varied geographical reach, which diversifies its business and allows it to ride on rising consumerism in Asia.

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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 Sudhan P doesn’t own shares in any companies mentioned.