Monday, 26 March 2018

Is Starhub's Dividend of 16 Cents Sustainable?

A few bloggers have written about whether Starhub's dividend of 16 cents per year is sustainable when Starhub released its results in Feb. This time last year, I reviewed the prospects of its various business segments and concluded that challenging times were ahead for Starhub's dividends. See Challenging Times Ahead for Starhub's Dividends for more info. In today's blog post, I will update the review and discuss whether Starhub's dividend of 16 cents is sustainable. Although mobile services is the largest business segment, I will discuss it last, for reasons explained later.

Pay TV

If you read Is Pay TV Still A Reliable Cash Cow?, you would know that the traditional advantage of Starhub over the other telcos is its cable TV network infrastructure, which is used to provide not only Pay TV but also cable broadband services. The cost structure for Pay TV is fixed capital cost for the network infrastructure, and mostly variable cost for the TV content. The network infrastructure has been in operations for many years and would have been mostly depreciated. Thus, the more subscribers Starhub can get on its Pay TV services, the more profits it can generate. Unfortunately, Pay TV has been on a decline in recent years due to competition from over-the-top service providers like Netflix and online privacy. Fig. 1 below shows the no. of Pay TV subscribers Starhub has since 2015.

Fig. 1: No. of Starhub Pay TV Subscribers

Although Starhub has been rationalising TV content to cut costs and investing into media companies like mm2 Asia to generate exclusive media content, it is difficult to see such measures being able to counter the decline in no. of subscribers. Furthermore, investments into media companies take away cashflows that could be paid out to shareholders. Thus, pay TV is no longer the cash cow it used to be.

Wired Broadband

The same story is repeated for the wired broadband business segment. Wired broadband can be categorised into cable broadband and fibre broadband. Although the total no. of broadband subscribers has remained steady, a breakdown of the no. of subscribers shows that the no. of cable broadband subscribers has continued to decline, in favour of fibre broadband. See Fig. 2 below for the no. of cable and fibre broadband subscribers.

Fig. 2: No. of Starhub Wired Broadband Subscribers

As mentioned above, cable broadband is served though the Pay TV network infrastructure, which is fixed capital cost and mostly depreciated. Thus, the less no. of cable broadband subscribers, the less profits Starhub can generate. On the other hand, fibre broadband is served though the Next Generation Nationwide Broadband Network run by Netlink Trust. Starhub has to pay Netlink a pre-determined amount of money for each subscriber. Thus, the profit margin for fibre broadband is lower than that for cable broadband.

Recently, Starhub has been running a promotion to get more customers on board its cable broadband services, but it is difficult to see Starhub being able to reverse the decline in the no. of cable broadband subscribers. Again, wired broadband is unlikely to become the cash cow it used to be.

Enterprise Fixed Network

This business segment is the rising star of Starhub, with increasing revenue annually. However, part of the revenue growth is from acquisition of companies. Exactly how much profits are generated from the revenue is unclear. Furthermore, as Starhub continues its acquisition path, this business segment will soak up more cashflow than it can generate. Last year, it spent $22.6M acquiring companies. This year, it has already spent $57.5M in doing so. So, do not expect this business segment to generate good cashflows to sustain its dividends.

Mobile Services

We have come to the most important business segment, which is the mobile services. Mobile services is under pressure from different sources, such as the SIM-only plans, data upsize plans, Mobile Virtual Network Operators (MVNOs) like Circles.Life, Zero Mobile and Zero1, plus TPG, the fourth telco. You can read more about the impact of SIM-only plans, data upsize plans and MVNOs at Will SIM-Only Plans Cannibalise Regular Telco Plans?Impact of Data Upsize Plans on Telcos and Will MVNOs Cannibalise Telcos' Business? respectively.

Thus, it looks like even mobile services is facing declining cashflows. However, Starhub recently did something that no other telcos did -- it silently raised the prices of its mobile services plans. It ditched the original regular plans which go by the names of 4G 3/ 4/ 5/ 6/ 12 (representing GB of data) and replaced them with plans which go by the names of XS/ S/ M/ L/ XL. These new plans come with unlimited data during weekends but also higher monthly fees. Generally, the fees are increased  across the board by $5.10 per month. As at end Dec 2017, Starhub has 1.37M post-paid subscribers. Assuming the higher fees do not drive them away, Starhub can expect to collect $83.8M (1.37M x $5.10 x 12 months) more in revenue and profits annually.

However, this $83.8M increase in revenue and profits will only materialise 2 years later, when all the existing 2-year telco contracts have expired and migrated to the new plans. For 2018, assuming the contract expiry dates are uniformly distributed, the expected increase in revenue and profits is about 25% of $83.8M or $21.0M.

Needless to say, the major caveat is Starhub's existing subscribers do not desert it in droves, considering that Singtel has mostly maintained prices (it raised price on its Combo 3 plan but dropped price on Combo 6 plan) while M1 has introduced big data plans, including an unlimited data plan at $118 per month. In the long run, this is likely to lead to subscribers switching to other telcos as they question the need to pay an extra $5.10 per month in exchange for unlimited data during weekends. But in the short run, there will be increased cashflow from the increase in prices.

Overall

Overall, we will see declining cashflows from Pay TV and wired broadband but increasing cashflows from mobile services. The Enterprise Fixed Network segment will continue to soak up cashflows through acquisitions. Thus, free cashflow will continue to decline in 2018. In 2017, free cashflow (based on Cashflow from Operations minus Cashflow from Investing) is only $190.1M. Dividing by 1,729.1M shares, free cashflow per share is only 11 cents. So, my conclusion is Starhub's dividend of 16 cents per share is not sustainable.

P.S. I am vested in M1, Netlink Trust and Singtel.


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