StarHub has just announced their full-year 2016 financial results. Similarly M1 announced their 2016 full-year results while SingTel furnished their YTD 9-month report card.
Given quite substantial coverage of these telco companies, 2 of which are component stocks of the STI Index, my intent is to comment more generally about StarHub’s latest score card and the Singapore telco sector as a whole.
Singapore Telco Landscape
Singapore for the last 16 years or so has three mobile operators, StarHub being the third mobile service provider to launch their services in the year 2000. They are also full-fledged telco operators offering voice, broadband, fixed, cable TV/Pay TV etc services to both the consumer and business markets.
SingTel is the only operator which has business operations outside of Singapore through wholly-owned subsidiary telco company like Optus in Australia and associate companies like AIS in Thailand, Globe in Philippines etc.
With 3 operators, the relative market shares soon came to some equilibrium with SingTel having the biggest share of wallet followed by StarHub and M1 being the smallest player.
The 3 of them also have been great dividend yielding “blue chip” companies to invest in.
Then it was announced that a 4th mobile operator will be allowed in. TPG won successful bid for the mobile spectrum on 14 Dec 2016 and looked set to become that 4th mobile service provider.
Closer Look At StarHub Results
We observe that service revenue is flat YoY but NPAT has declined 8%. The revenue breakdown however shows revenue decline from Mobile and Pay TV while Broadband and Enterprise Fixed are contributing to the revenue growth. Operating expenses have gone up as the revenue stays flat.
If we look at the earnings per share (EPS), this is the first time in 5 years that it has dropped below $0.20 to $0.1976. As you know, StarHub has been paying 20 cent dividend per annum, and this means the dividend payout ratio is now > 100%. StarHub also announced that they intend to pay a quarterly cash dividend of 4.0 cents or $0.16 per annum per ordinary share for FY2017.
EPS have been steady or growing gradually for the past 5 years for all 3 telcos until 2016 with only SingTel holding up.
We can safely conclude that we are not going to see tremendous growth potential from these companies and their share prices will be supported mainly by the sustainability of the dividend payouts.
It is worthwhile noting that the squeeze on both revenue and margins arises from a few disruptors like Whatsapp and Skype usage instead of SMS and traditional voice calls and roaming, OTT like Netflix instead of pay-TV. This is not going away and this worries me more than the entry of the 4th mobile operator.
With further impending competition from TPG and other MVNOs (mobile virtual network operator), and in the absence of much service differentiation, there will be some degree of price war and EPS will likely drop further in the future.
My Personal Take
There are definitely still opportunities and new revenue engines for telcos and a few areas are often cited such as Smart City projects, IOT, M2M, ICT and Cloud Services etc. How big a revenue and bottom line contributions these will bring is anybody’s guess.
Providing great Customer Service and continually delighting customers with competitive and differentiated offerings will be quite key to reducing churn.
Having said so, I will definitely avoid StarHub and M1 until we see a new equilibrium with TPG in the fray. StarHub share price is $2.79 as of 10 Feb 2017. With a dividend of $0.16, the yield is 5.7%. A price range around $2.80 will probably hold for a while but as soon as $0.16 dividend payout is not sustained, price will definitely drop.
With this analysis, I hope you can make better informed decision if the fairly safe dividend payout in the shorter term warrants buying into StarHub at this point while it faces the various headwinds as mentioned.
If you do, it is imperative to closely watch for further organic declines in revenue and margins, and whether new business and process innovations launched are stemming EPS declines. You want to take appropriate trading actions swiftly when outlook changes substantially.
Disclaimer : the above is purely my personal valuation of the price justification of the mentioned companies and it does not imply or constitute a recommendation or advice for trading or investment. I have small existing positions in StarHub.