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StarHub’s Latest Earnings: Dividends Might Be Reduced Again

StarHub Limited (SGX: CC3) is a Singapore company that delivers communications, entertainment, and digital solutions, and it’s one of the three major telecommunication (telco) companies in Singapore. The group’s main divisions include mobile, pay TV, and broadband services.

According to StarHub’s latest Q2 2019 earnings report, released recently, the telco continues to face pressure on both its top and bottom lines. Total revenue declined by 7.4% year on year, caused by a 5.2% year-on-year drop in service revenue and a steeper 15.4% year-on-year fall in revenue from equipment sales. Operating expenses only declined by 3.5% year on year, resulting in a sharp drop in operating profit to S$57.3 million from S$84.2 million. Profit after tax plunged by 36.1% year on year to S$39.5 million, and StarHub declared an interim dividend of 2.25 Singapore cents, implying a 12-month historical dividend yield of 6.2%.

Weakness in all three major divisions

StarHub is facing broad-based weakness in all of its three major divisions. For its mobile division, revenue fell by around 10% year on year due to the entry of new mobile virtual network operators (MVNO) and also the launch of StarHub’s new digital mobile brand giga. MVNOs frequently offer cheaper data bundles in order to entice customers to sign up with them, and this negatively affects StarHub’s mobile data revenue as customers increasingly switch over from voice and IDD.

The pay-TV division witnessed a significant 23.6% year-on-year decline in revenue to S$64.7 million as the number of pay-TV customers fell almost 15% year on year to 374,000. The churn rate has also risen to 2.1% from just 1.1% last year. Broadband services saw a small decline in revenue of 2.2% year on year to S$45.1 million, mainly due to lower average revenue per user (ARPU), which brings me to the next point.

ARPU decline is an ominous sign

A major red flag popped up for me when I noticed that all three divisions posted declines in ARPU. ARPU represents the average rate StarHub charges customers for the services it offers. A decline in ARPU signals a loss of pricing power and may also indicate either an erosion of market share or stiffer competition.

For mobile, ARPU for post-paid declined by 10.2% year on year to S$40 per month per user, and it was only offset slightly by a 2.1% increase in ARPU for pre-paid customers. The decline was equally steep for pay TV, at 11% year on year to S$44 per month per user from S$53 a year ago. Broadband’s ARPU fell by 6.7% year on year to S$29 per month.

Current dividends may not be sustainable

Aggressive price competition in the mobile market should continue to negatively affect ARPU for the mobile division, even though subscriber numbers remain relatively stable. For pay TV, StarHub is experiencing significant attrition rates as more customers migrate to alternative platforms such as Netflix or Apple TV. ARPU will also continue to be pressured as these competitors offer lower rates, forcing StarHub to have to offer more promotional discounts to entice subscribers. The broadband division has a stable subscriber base, but ARPU will continue to be under pressure as the company gives out more discounts to retain loyalty, and also as StarHub migrates its network to fibre broadband by the end of Q3 2019.

StarHub’s earnings per share for the quarter were 2.2 Singapore cents, while the group declared a quarterly dividend of 2.25 Singapore cents. This is a payout ratio of around 102%, and assuming the profit decline continues for all of StarHub’s divisions, the group may need to reduce dividends further. Note that StarHub had already slashed annual dividends over the last five years from a high of S$0.20 to S$0.16, and now to S$0.09.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.