cfa research report _team fantastive five (updated)
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Local Challenge CFA Society of Singapore Nanyang Technological University---The Fantastic Five
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Date: 11/10/2015 Current Price: SGD3.61 Recommendation: Hold Ticker: CC3.SI (STI) USD1.00: SGD1.39 Target Price: SGD 3.90
Highlights
We issue a hold recommendation on StarHub with a target price of S$3.90
at 2015 year end using the Discounted Free Cash Flow to Firm Method. This
offers a 8.03% upside from its closing price of S$3.61 on October 9, 2015.
StarHub is expected to generate a stable revenue and cash flow given its
wide range of services which allows the diversification of risk. Moreover,
despite of the intense competition with SingTel and M1, StarHub's
consistent good performance, low customer churn rate at 0.8% and a
stable dividend signal its sustainability and healthy status.
Challenge of its core business and mitigation effects
StarHub is expected to face a continuous decline in the field of its pillar
service, mobile service. Internet offers substitutes, like WhatsApp and
FaceTime for voice call and SMS. The revenue generated by International
roaming would also decrease, which further reduces StarHub's revenue.
However, the higher demand for data plan and internet services would
mean a higher revenue for StarHub. This tends to offset the adverse effects
brought by the lower demand for mobile services. Moreover,
i. mobile services are still considered as necessities for most of
Singaporeans
ii. StarHub diversifies in various businesses
iii. its continuous launch of innovative products and quality services
we expect StarHub to continue its stable performance.
Steady Financial Statement Performance
From 2009 to 2014, the company has been able to consistently convert revenues into stable operating margins
ranging from 15.3% to 20.0%. The company is also able to generate positive operating cash flows, ranging from
594.7 million to 696.2 million. However, given the high debt of StarHub, it faces constraints on its expansion or
venture into other areas. Thus we may expect a continuous steady performance of StarHub.
Main price growth drivers:
1) Smart Nation and data analytics service
2) Joint venture with Nokia to develop liquid application, a superior network technology
3) StarHub Data Centre powered by IO, a secure IT infrastructure. Starhub diversifies its revenue generator to
hedge against the low growth in the mobile sector.
Main risks issues are new competitors due to relaxation of regulation, as well as threat from Over-the-Top (OTT)
application. Higher than average debt-to-equity ratio may lead to solvency risk and unforeseen interruption of
service could cause customer dissatisfaction. Number of mobile users could also decrease due to preference to
online chatting applications.
Nanyang Technological University of Economics Student Research
This report is published for educational purposes only by
students competing in The CFA Institute Research Challenge.
Telecommunication Service
Starhub Ltd
Market profile
52wk Range 3.40 - 4.46
AvgVol (3m) 1,855,620
Market Cap 6.24B
P/E 17.11
Return on Equity (ttm):
15.60%
Shares outstanding 1.73B
EBITDA (ttm): 691.70M
Total Debt/Equity (mrq):
443.26
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Operating Profit Margin
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Business Description
StarHub is the second largest fully-integrated info-communications company in
Singapore. It offers a range of information, communications and entertainment
services for both consumers and businesses. StarHub operates Singapore's fastest
two-way HSPA+ mobile network that delivers up to 21Mbps for downlink to
complement its nation-wide GSM network and an island-wide HFC network that
delivers multi-channel cable TV services (HD TV and On-Demand Services included)
as well as ultra-high speed residential broadband services. The company delivers
Mobile, Pay TV, Broadband, Fixed network services and equipment sales on an
operationally integrated network, customer service, sales, marketing and
administration support.
Main Revenue Generator is still the mobile business division. Always accounting for approximately 50% of total revenue for the company. Having a Mobile Penetration Rate of 148%ii in 2014, it is not surprising that this will be a gold mine for the company to focus on. Not to forget that big companies such as Apple and Samsung who very frequently launch new flagship products to capture consumers, StarHub nevertheless will always be on the winning end of being the second largest telecommunications company in Singapore.
Strategies to remain competitive.
Enhancing Customer’s Experience and Loyalty – StarHub is concentrating its efforts on providing outstanding customer’s experience and increasing customer’s loyalty. Some initiatives they have kick started are collaborating with AirAsia BIG, NTUC Link and other merchants to expand their customer loyalty programme base.
Consolidation – With the merger of Customer & Enterprise Sales, Customer Service and Operations group into a single group, it is a move done to achieve cost efficiency and deliver better service experience for customers by integrating its contact point of sales, service and delivery.
Creation of I3 – Innovation, Investment and Incubation is a new division in-charged of providing the creative juices needed for the firm to remain competitive in the market. Responsible for identifying new forms of service, new markets and platforms in order to compete against disruptive entrants into the market. Additionally, StarHub has started planning and deploying of TVWS network to create wireless connectivity channels for broadband access and backhaul uses, giving a boost for machine-to-machine (M2M) communications.
Corporate Management - The Management Team and the Board of Directors comprises of experienced and performance oriented people who have stood to the test of time and proven to be able to produce returns.
Mr Steven Terrell Clontz - is a familiar face who returned to StarHub on 15 July 2015 as Chairman. During his CEO tenure in StarHub, he oversaw numerous significant milestones of the company. Introduction of Residential Broadband, introducing first-in-market features such as Per Second Billing and Free Incoming Call, the first in Asia and among the first worldwide to establish cable broadband open standard, launching Singapore's first prepared broadband service - MaxOnline 2000 FlexiSurf and being the first in the world to commercially launch 1000Mbps are just a few milestones made under his helm as StarHub's CEO. It is quite evident that Mr Clontz's experience in the telecommunications and media industry has been well utilized to be able to create such major milestones.
Mr Tan Tong Hai - A veteran with 20 years of experience in the regional IT, Internet and e-commerce industries with broad experience at top management levels. In a competitive Telecommunications industry, Mr Tan was still able to create
6 Independent
Directors
Figure 1 Revenue Breakdown
Figure 2 Revenue growth by sector
Figure 3 13 Board of Director
$1,248$390
$202
$378
Revenue Breakdown IN Millions
Mobile Pay TV
Broadband Fixed Network
0
500
1000
1500
2000
2500
2010 2011 2012 2013 2014
5 -Year revenue growth by service sector
Fixed Network
Broadband
Pay TV
Mobile
1
12
Board of Directors
Excutive Director
Non-Executive Directors
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milestones such as launching StarHub TV on Fibre for commercial customers, Introducing HD Voice for crystal clear mobile voice calls and launching the first free-to-cable channel - Super Sports Ariana - in Singapore.
Industry Overview and Competitive Positioning
Telecommunication industry is characterised by significant entry barriers: high regulatory and licensing fee, existence of economic of scale and high capital intensity (please refer to Porter’s 5 forces analysis in appendix). Currently there are 3 main telecom companies, namely SingTel, StarHub, and M1. StarHub is the second largest telecommunication company in Singapore and has strength in cable broadband and TV.
Due to moderate number of suppliers such as Nokia and Huawei, Singapore telecom companies enjoy diluted bargaining power of suppliers. Competition in the industry is currently low as indicated by HHI index of 0.36. However, after the Next Gen NBN industry framework was implemented, barrier of entry was lowered significantly. Although more new competitions are expected to wade in and gain share quickly by competing on price, new entrants will incur significant network capex. Most of the sites are already occupied by existing telcos. We believe network capex for the 4th telco could well exceed US$500m versus US$250m-300m capex intended by MyRepublic. Current telco are expected to maintain their handset subsidies and marketing expenses as telcos may want to lock in customers before the 4th telco's entry.
Singapore market already saturated. The Singapore mobile market has likely already hit saturation point, with the penetration rate easing back to 152.4% in Aug 2014.
Reliance on legacy revenues still high in Singapore. Singapore telecom industry depends heavily on revenue generated from traditional telecom services. Although LTE penetration has reached as high as 70% in Singapore, voice and SMS accounted for around 57% of the revenue in 1H15. It is because voice pricing in Singapore is high on a regional basis and roaming revenue is still a substantial source of service revenue. Yet, legacy business is declining as a global trend, as more companies in the developed countries offer data based pricing with unlimited voice calls. We expect data services to be new revenue generator and mobile operators are attempting to stem the fall by adopting tiered pricing plans to lift revenue from it.
Decreasing post-paid ARPU due to flattening data usage. According to DBS group research, by June 2015, average data usage per customer at M1 stood at 3.2GB, flat q-o-q. It is because companies have already captured most of the upside from data growth. M1 disclosed that 72% of its subscribers are on tiered-data plans (4G), with 23% of them exceeding their data caps in 2Q15. Average data usage by smartphone users is approaching the 3-4GB data allowance offered by popular tiered-data plans, priced around S$60-65. With excess data charges as high as S$10.70 per GB and Singapore also has a strong fixed broadband network, there is a strong incentive for smartphone users to switch to Wi-Fi networks as much as possible. Therefore, although post-paid subscribers inching up another 0.8% QoQ (OCBC Investment 2015-08-28: Telecom Sector) revenue still decreases.
Significant yet decreasing capital investment and telecom revenue return to growth. In 2014, investment increased at a real annual rate of 1.5% following a contraction of 2.0% in the previous year. Per capita capital investment stood at SGD190 (US$150) in 2014. Total telecom revenues recorded an annual real expansion of 3.0% in 2014, compared to a 0.2% growth in the previous year. However, compared to 2009, there is a 4.1% decline in real terms for total capital investment and a 6.0%
Figure 4 Revenue Comparison
Source: Team Estimates
Figure 5 Legacy Business
Figure 6 Post-paid ARPUs decline
0.00
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15000.00
20000.00
25000.00
In m
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Comparison of revnuein industry
Starhub Singtel M1
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contraction in terms of revenue. Singapore was placed in 12th position in terms of both its telecom capital investment and revenue return in Asia Pacific in 2014. We expect a slow-down of the investment in mobile network, due to absence of immediate technology breakthrough to replace LTE. Commercial launch of 5G is not expected to occur before 2020.( The Economist Intelligence Unit )Revenue return is expected to decrease due to decreasing ARPU.
Starhub holds a grow strategy as it has medium industry attractiveness and high business unit strength. Its biggest revenue generator is still in Mobile. Mobile revenue was flat y-y, which was the second consecutive quarter of flat revenue (Q2,2015). StarHub noted that the prepaid revenue decline, and lower IDD were offsetting growth in post-paid. This compared with a 1% decline for M1.(Nomura ) It collaborates with Nokia to develop liquid applications which is a superior mobile network technology, conducts trials on Rich Communication Services, and becomes the 1st operator in SEA to provide VoLTE calls on new iPhone. Starhub also ventures into low-cost mobile phone market, selling Xiaomi from February 2014. Launch of Xiaomi’s Redmi Note in Singapore sees 5,000 phones sold within 42 seconds. These projects will be new revenue generator for Starhub due to greater product differentiation.
Smart Nation and data analytics will be key drivers of growth for Starhub. According to Deutshe Bank Research report, two tenders under the government’s Smart Nation initiative are currently open – one for the core network and the other for the kerbside boxes (called above-ground boxes) that will house the sensors and servers. STH became one of the four collaborators in a project called FASTER (Fusion Analytics for public Transport Emergency Response). Further, STH believes its roll-out of big-data analytics tools will be a strong revenue driver. STH's new advertising solution – Smart Targeting leverages different sources of StarHub big data to offer precise targeting capabilities to support advertisers’ campaigns cross platforms. The platform not only provides valuable insights to clients, but also helps to lower STH’s internal cost of retaining customers.
STH has been working with technology partners to strengthen its solution offering to large corporations, SMBs and public sector organisations. In 2014, STH teamed up with IO to provide customers with a secure IT infrastructure, namely ‘StarHub Data Centre powered by IO’. To help SMBs lower upfront IT set-up cost, STH offer Software-as-a-Service via its cloud platform and Unified Communications solutions that they can buy on demand and scale according to dynamic business needs.
The Pay TV and Broadband businesses saw an increase in both their respective customer bases (+1.7%, +4.8%). Low churn rates were also maintained. STH Not only introducing a growing number of channels (225), it also extends StarHub TV Anywhere to other platforms too like on Windows and Xbox. STH is also 1st Local operator to offer high-speed dual-band routers. These projects show STH adopts a grow strategy to compete with SingTel for more market share in the Broadband and TV sector.
Table 1 GE Matrix
Market growth rate
6.25%
Market size STI : 3,352.65
Macroeconomic factors
greater competition
due to regulation changes
Business unit strength
Market share
SingTel over 47%
Starhub 28%
M1 27%
Brand equity Market Cap 6.24B
P/E (ttm) 17.11
Source: Yahoo Finance
Figure 7 Acquisition cost
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Investment Summary
We issue a HOLD recommendation on StarHub with a target price of S$ 3.90 using the Discounted Free Cash Flow to Firm
method. This offers a 8.03% upside from its closing price of S$ 3.61 on October 9, 2015. Despite being in a likely saturated
market with intense competition, Starhub can still capitalize on its existing customer base and network infrastructure to
maintain a steady growth rate in the next five years. Starhub will be mainly driven by post-paid mobile revenue, broadband and
fixed network revenue in the next five years, and possibly leveraging on new opportunities such as the Smart Nation Initiative
and big data analytics, further maximizing the firm's value.
Valuation Method
We derived our target price by using the Discounted Free Cash Flow to Firm method. (Justify this method)
Steady financial performance
StarHub demonstrates steady performance throughout 2009 to 2014. The relatively high and stable EBITDA margin shows a
steady growth of StarHub. However, its liquidity ratios and high debt ratios indicate a large debt, which may bar it from further
expansion or ventures into other businesses. Therefore, we expect StarHub to continue its current steady performance .
Prospect of this market: The telecom market is expected to remain at low competition level as the entry of new entrant is
deterred by high initial capex and economic of scale achieved by existing telecom companies. However, the potential for rapid
growth is small for telecom industry because Singapore market is already saturated. Limited data plan and high fee charged for
excess data makes data usage growth stagnant. The main revenue generator of Singapore telecom industry is still legacy services
such as voice calling and roaming. Thus, revenue is further impacted by customers' increasing preference to online chatting
application, showing a decreasing post-paid ARPU and a 6.0% contraction in terms of revenue return to growth in 2014
compared to 2009. STH remain competitive in the industry by upgrading 4G network, as well as investing in researches and
development joint ventures. Liquid application and Rich Communication Services could be potential revenue generator in the
future. Apart from mobile sector, Starhub expand to data analytics, developing advertising solution – Smart Targeting which
leverages different sources of StarHub big data to offer precise targeting capabilities to support advertisers’ campaigns cross
platforms. STH also target SMBs, offering Software-as-a-Service via its cloud platform. Although the growth in pay TV is weak
(1.7% increase in customer base and 1% increase in revenue), STH remain a comparative edge over its competitors.
Possible Investment Risks
Key risks investors must be aware of include the market risk like the entry of a fourth play MyRepublic, the more prevailing use
of the over-the-top applications, and the trend of users abandoning traditional mobile services (voice calls and SMS). There are
also regulatory risks like Singapore government's restriction on pre-paid card and the more stringent foreign worker policy,
which result in decreasing demand for StarHub's pre-paid services. In addition, the policy which has lowered the barrier to entry
for the Telecommunication industry poses another threat for StarHub. There are also operational risks like high debt ratios and
unplanned breakdown of equipment. Investors may pay attention to the risk generated by the appreciation of US dollar. A
detailed discussion of the risks, mitigation factors and their impacts on StarHub's value are discussed in the Investment Risk
section.
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Valuation
We used the Discounted Free Cash Flow to Firm (DCFF) method in estimating a target
share price of $3.90 per ordinary share for Starhub Ltd. Our DCFF model is sensitive
to the following factors. Based on current share price, we recommend to HOLD the
stock of Starhub.
Revenue forecast: The expected free cash flow is generated from the forecasted
revenue, making this the most crucial and sensitive element in valuing Starhub. Our
estimated growth in revenue in the next five years is mainly driven by Mobile,
Broadband and Fixed network services.
Mobile Revenue: Mobile revenue is estimated to grow at a steady rate of 2.1% -
2.7% in the next five years. ARPU for both post-paid and pre-paid users should
remain flattish. While international and roaming services revenue will be
adversely affected by Wi-Fi-enabled network services via Whatsapp, Line, Skpye
and other network-based calls, and local SMS and voice revenue, which
constitutes 57% of mobile revenue, would likely decline due to the same reason,
revenue from data services should increase in the trend of increasing mobile
network usage so as to offset the decline in the traditional legacy business.
There had been concerns that Singapore 4G market might have reached a state
of saturation such that data usage will become flattish. Nonetheless, since only
50% of Starhub customers are currently using 4G LTE services with the remaining
using 3G, mobile data usage and revenue should still maintain a steady growth
in the next five years when more customers switch to 4G mobile plans.
Prepaid mobile subscription rate had been stabilizing over the past three
quarters since the sudden drop in 3Q14. As such, we used weighted moving-
average to forecast the prepaid subscription in the next five years, with the
highest weightage associated with the most recent demand. On the other hand,
for post-paid mobile subscription, there had been a trend of a steady increase in
the subscription rate over the past three years. As such, we used trend-adjusted
exponential smoothing average to forecast future demand.
Broadband: Broadband revenue is expected to experience a decline in
2015, and increase at a rate from 2.9% to 3.2% in the next four year
until 2019. The decline in broadband revenue in 2015 is mainly a result
of declining ARPU due to intense price competition in broadband
Figure 8 Stock Price of Starhub from 2011 (Source: Yahoo finance)
Figure 97 Proportion of Starhub users by types of network
Source: DBS Bank
Figure 80 Proportion of Starhub users by types of network
Source: Opensignal.com
43
10
47
0 20 40 60
DATA
SMS
VOICE
50%
30%
20%
LTE HSPAP HSPA
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services. However, the customer base for Starhub broadband had been
in an upward trend in the past 5 years. Moreover, the declining ARPU
would be expected to stabilize in $33 after decreasing for more than 12
consecutive quarters. Once ARPU is stabilized, the broadband revenue
will likely drive Starhub’s growth.
Fixed network services: Fixed network services is expected to grow at
2% to 5% for the next five years. While voice revenue dropped by 6% in
2H15, data and Internet revenue increased for 7%. Such a rise in
revenue is mainly from demand for corporate sector, which should
continue to well perform in the near future, especially when Starhub
had spent capital expenditure in developing their own fibre for
commercial customers.
In addition, Starhub had been intending to aggressively participate in
the tenders for the Smart Nation Initiative, which requires the building
of kerbside boxes to store servers and sensors nationwide. This would
also be a main revenue driver for fixed network services should Starhub
successfully become a tender.
Other revenue: revenue from sale of equipment should remain flattish
in the near future, despite the popularity of incoming iPhone 6S plans,
as Apple had been reviewing its subsidies and telco companies like
Starhub may bear additional costs. Revenue from Pay TV had been
flattish for 1H15, and the revenue prospect will be facing challenges in
the future.
Nonetheless, the Hubbing-In strategy seem to be increasing customer
stickiness, leading to a more promising revenue aspect for all Starhub
products and less customer churn. In addition, the utilization of Big Data
analytic tools could offer insights to clients and reduce cost of marketing
by reducing the cost of retaining customers, leading to a more optimistic
estimation of Starhub’s revenue growth.
Dividend Policy: It is assumed that Starhub will still pay high dividend. (Pay-
out ratio of over 90% since 2007, and an exceptional pay-out ratio of 130%
in 2010) The 20 cents dividend per share is expected to be sustained until
2019.
Terminal Growth: We estimate a 0% terminal growth rate due to intense
competition in broadband and mobile market, and the threat of a 4th telco
company which potential lower revenue for all three existing operators
especially in the broadband sector, MyRepublic’s (the possible 4th telco
company) existing rather successful business.
Weighted Average Cost of Capital (WACC): We estimated WACC based on
CAPM. By regressing daily returns for Straight Time Index and Starhub Ltd,
we have obtained a beta of 0.614. We have used the 10-Year Singapore
government bond rate as the risk-free rate, which is 2.52%.As such, we
arrived at a cost of equity of 6.08%. For cost of debt, we estimated using the
interest rate for medium term note at 3.08% per annum subject to 17%
corporate tax. As such, the estimated WACC is 5.74%.
Table 2 Monthly ARPU by service
Service APRU($)
Mobile Postpaid 69
Mobile Prepaid 18
Broadband 33
Cable 52
Source: Company Dara and Team Estimate
Figure 11 Pay TV Subscription
Source: Company data and team
estimates
Figure 12 Sale of equipment revenue
Source: Company data and team
estimates
Table 3 WACC Breakdown
WACC Calculation
Risk Free 2.52%
Market Risk Premium 6.08%
Beta 0.614
Cost of Equity 6.08%
Cost of Debt 3.08%
WACC 5.74%
Source: Team Estimates
526.00528.00530.00532.00534.00536.00538.00540.00542.00544.00546.00
0
50
100
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Financial Analysis
StarHub reported an increase in total revenue of 2% in 2H15 and 5% on a half-year
basis. Although total revenue increases generally from FY2011 with a huge hike in
FY2012, net profit margin is maintained around 15%. The company has EBITDA
increased at a decreasing rate from FY2012 to 2014 and maintained a stable EBITDA
margin varying around 29% over the past four financial years. Provided that no
major changes in business strategies and investing projects, we expect this trend to
continue in the future and no major changes in profitability level will be observed.
Profitability|Expecting ROE to reduce at decreasing rate
Based on historical trend, StarHub generated higher Return on Equity (ROE) ratio
than its competitors, SingTel and M1. Yet this may not indicate a better investment
opportunity since its ROE ratio was decreasing drastically whereas SingTel and M1
maintained a rather stable ROE ratio. The ratio decreases drastically from 2012 to
2013 due to a huge increase in total equity from 43.5 to 137.8 million. Since the
equity base has increased at a faster rate than revenue rise, we expect the ratio to
continue decreasing but at a decreasing rate provided that the share policy of the
company has no major changes in the near future.
Cash Flow|Enhancing cash generating abilities
Based on observations of historical StarHub’s cash flow trend, an increase in net
cash flow was observed since 2013 and we expect that future net cash flow follows
the trend and maintains at a slightly positive level. This implies an improvement in
cash generating abilities.
Liquidity|Maintaining at industry average level
The company’s liquidity was relatively stable on the ground that Current Ratio varies
in a range between 0.55 and 0.7. Compared with SingTel and M1, StarHub incurred
a relatively steady liquidity risks and maintained around the industry average level.
Hence we forecast that the trend continues with no major changes in the liquidity
ratios.
Structure of Financing|High leverage on debt
In previous years, the company financed its resources with mainly debt that was
nearly 30 times of equity in FY2011. Despite a reduction in the leverage of debt over
the past four financial years, the company’s debt-to-equity ratio is still far higher
than the other two companies. Given that high leverage on debt implies a high
insolvency risk, the company is seeking to adjust its disproportionate capital
structure to reduce insolvency risk. Therefore, we forecast that the ratio will follow
the decreasing trend, but decreases at a slower rate. The prediction provides that
the ratio will reduce to 500% until 2019 and the company is not likely to achieve a
balanced capital structure with a reasonably acceptable debt-to-equity ratio in the
near future.
More Investment on Fix Assets|Higher revenue growth potential
Given that StarHub is a service company and customer satisfaction has significant
impact on its revenue growth, the company’s investment in its fixed assets will be a
crucial indicator in predicting its future growth. Based on historical investing trend,
the company has a rising CAPEX to sales ratio and we expect the trend continues,
which implies a stronger growth potential.
Figure 13 Profit margins
Figure 14 ROE ratios
Figure 15 Net Cash Flow
Figure 16 Liquidity -- Current Ratio
Figure 17 Debt-to-Equity Ratio
Source: Team Estimate
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
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2011 2012 2013 2014 2015 2016 2017 2018 2019
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StarHub
Total Revenue EBITDA
EBITDA margin Net Profit Margin
0.00%
500.00%
1000.00%
1500.00%
Comparison of ROE ratio
StarHub Singtel M1
-200.00
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2011 2012 2013 2014 2015 2016 2017 2018 2019
IN M
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S SG
D
Net Cash Flow Chart
Net Cash Inflow
Net Cash Outflow
Net change in cash and cash equivalents
0.00%20.00%40.00%60.00%80.00%
100.00%120.00%
Current Ratio
StarHub M1 SingTel
0%
500%
1000%
1500%
2000%
2500%
3000%
3500%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Debt-to-Equity Ratio
StarHub M1 Singtel
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Investment Risks
Market Risk |New competitors
Besides the intense competition with SingTel and M1, the entry of MyRepublic in 2017 would pose a threat to StarHub.
MyRepublic announced its intention to offer unlimited data packages as its main selling point. This would take a large market
share away from StarHub, adversely affecting its cash inflow. Thus we would expect a 4% decrease from 2017 onwards, causing
the value of StarHub to be $3.76 at 2015 year end. 0ur recommendation still holds under this situation.
Regulatory Risk |Low barrier to entry
After the Next Gen NBN industry framework was implemented, barrier of entry has been lowered significantly. There would be
many new competitors entering this industry after the bidding starts. OMGTel! has indicated its interest in joining this industry.
This would have an adverse impact on StarHub's market share. However, since StarHub is more experienced and plans to
counter this by offering its subscribers better value, with innovative new products like the Dual Broadband plans giving them
both fibre and cable access, we would expect a relatively stable customer base and 3% decrease in its cash inflow from 2017
onwards. Given the threat of MyRepublic, there would be a total decline of 7%, which leads to a valuation of $3.64 at the 2015
year end.
Regulatory Risk | Stringent restriction on foreign workers and prepaid SIM cards
Given the government's more stringent foreign worker policies, StarHub's pre-paid business is facing a slowdown in its core user
base – the foreign workers. This would cause a lower cash inflow and downward valuation of StarHub. The government’s
restriction on the number of prepaid SIM cards one person can register further dampens this effect. It has already shrunk
StarHub's pre-paid user base by 9% and would curb the revenue StarHub can generate from the pre-paid sector in the future. If
the government puts further constraints, StarHub would be even more adversely affected. Assume prepaid card subscription fall
by half, revenue reduce by 91.8m dollar. 4% 3.76
Market Risk |Threat from Over-the-Top (OTT) application
OTT applications may siphon potential revenue opportunities from the industry as a whole. StarHub would also face less
demand for its Pay TV service and less revenue. If the OTT further expands, it may replace pay TV and significantly reduce the
cash inflow for StarHub, causing a down valuation which may contradicts with our recommendation. However, as StarHub is
partnering OTT players like LINE and WeChat to introduce unlimited data plans to access their services for the pre-paid segment,
there would be mitigation effects decrease by 6% $3.68
Market Risk |Change of user behavior
There is a trend for mobile phone users to use more online chat applications. Not only domestic usage of sms and phone calls
declines, {chart}International and roaming revenues would continue to decline sharply as consumers use WhatsApp, Facetime
and LINE calls over Wi-Fi when overseas. The switch of user behavior would mean a decline of future cash inflow for StarHub
and thus a lower value. 2% decrease, $3.83
Operational Risk |High debt ratio
The debt ratios of StarHub is much higher than SingTel and M1, indicating a greater solvency problem. If StarHub encounters
unexpected revenue decline and do not have enough money to repay its debts, it may face greater default risks which may exert
a downward pressure on its stock price. StarHub is consistently trying to lower the debt ratios to reduce this risk. Given the
downward trend and the stable profit of StarHub, we expect the debt ratio to gradually decline until it reaches the healthy level.
Operational Risk |Unplanned breakdown of equipment
As the services provided by Telecommunication industries are considered as necessities, breakdown of infrastructure would
cause an unexpected outrage of StarHub's services and reduce its customer number. StarHub is aware of this and is investing
significantly in CAPEX {chart} to mitigate the risk.
Foreign Currency Risk | Appreciation of USD
USD is the currency that will give rise to the above risk. StarHub is exposed to having USD 28.7m. With analysts expecting the
Federal Reserve Banks hiking rates in the near future, this would result in an appreciation in the USD where there will not be a
limit to the magnitude of risk. Currently StarHub does not hold any forward exchange contracts. They should look into this area
to get hedge their exposure.
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Appendix A Income Statement
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Total Revenue 2150.00 2237.70 2312.00 2421.60 2369.60 2387.20 2374.28 2417.62 2481.61 2536.42 2579.50
Operating Expenses -
1741.60 -
1901.40 -
1935.20 -
2001.00 -
1946.00 -
1957.10 -
1920.21 -
1949.86 -
2001.57 -
2047.59 -
2081.11
Other income – 6.00 21.40 26.70 49.90 46.60 41.07 45.86 44.51 43.81 44.72
Profit from operation 408.40 342.30 398.20 447.30 473.50 476.70 495.14 513.61 524.56 532.63 543.12
Finance income 0.80 1.80 2.10 4.10 2.80 2.00 2.97 2.59 2.52 2.69 2.60
Finance expense -24.00 -26.60 -20.50 -20.00 -18.80 -22.60 -20.47 -20.62 -21.23 -20.77 -20.87
Net finance (costs)/income -23.20 -24.80 -18.40 -15.90 -16.00 -20.60 -17.50 -18.03 -18.71 -18.08 -18.28
Profit before Tax 385.20 317.50 379.80 431.40 457.50 456.10 460.14 477.55 487.13 496.47 506.57
Taxation -65.50 -54.30 -64.30 -72.10 -78.00 -85.60 -92.03 -95.51 -97.43 -99.29 -101.31
Profit for the year 319.70 263.20 315.50 359.30 379.50 370.50 368.11 382.04 389.71 397.18 405.26
Attributable
Equity of the company 319.70 263.20 315.50 359.30 379.50 370.50 368.11 382.04 389.71 397.18 405.26
Profit of the year 319.70 263.20 315.50 359.30 379.50 370.50 368.11 382.04 389.71 397.18 405.26
Earnings per share
Basic 18.68 15.34 18.40 20.90 22.10 21.50 21.32 22.13 22.57 23.01 23.48
Diluted 18.58 15.27 18.30 20.80 22.00 21.40 N/A N/A N/A N/A N/A
EBITDA 653.50 601.80 676.00 719.80 743.00 747.90 708.66 731.42 747.52 763.42 778.44
Capex 230 272.1 246.5 272.2 302.8 321.6 340.4 365.1 376.50 387.91 405.96 Depreciation and Amortisation 245.1 259.5 277.8 272.5 269.5 271.2 268.98 274.5 281.61 287.72 292.74
EBIT 408.40 342.30 398.20 447.30 473.50 476.70 439.68 456.92 465.91 475.70 485.70
Source: Company data and Team Estimate
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Appendix B Balance Sheet
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Non-current assets
Property, plant and equipment 785.1 776 761.9 791.1 857.4 911.1 904.1 949.0 995.3 1030.2 1057.4
Intangible assets 415.8 451.6 423.6 397 380.6 404.5 382.6 364.8 360.8 356.7 348.1
Subsidiaries 0 0 0 0 0 0 0 0 0 0 0
Balances with related parties 0 0 0 0 0 0 0 0 0 0 0
Deferred tax assets 5.3 4.5 2.8 2.5 0 0 0 0 0 0 0
1206.2 1232.1 1188.3 1190.6 1238 1315.6 1286.7 1313.8 1356.1 1386.9 1405.5
Current assets
Inventories 28.2 31.8 37.2 28.1 43.2 42.4 44.8 47.5 50.6 55.5 56.2
Trade receivables 125.3 173.9 152 142.3 156.2 161.7 163.8 157.6 165.4 170.0 169.8
Other receivables, deposits and prepayments 116.1 101.7 149.2 123.6 154.4 185.9 186.6 206.8 214.0 221.2 238.7
Balances with related parties 22.6 16.5 17.2 12 24 17.4 17.4 20.1 21.0 22.0 20.7
Cash and cash equivalent 234.2 237.5 179.2 312 266.9 264.2 286.1 262.2 268.8 255.1 255.0
526.4 561.4 534.8 618.0 644.7 671.6 698.7 694.1 719.8 723.8 740.3
Total Assets 1732.6 1793.5 1723.1 1808.6 1882.7 1987.2 1985.4 2008.0 2075.9 2110.7 2145.8
Current liabilities
Trade and other payables 573.6 675.1 702.9 728.1 753.7 795.8 842.1 863.5 899.7 935.9 972.1
Balances with related parties 42.1 41.8 41.9 56.5 76.5 99.2 100.1 121.4 129.1 136.9 144.6
Borrowings with related parties 290.4 330.4 75 0 0 200 162.5 125.0 87.5 50.0 50.0
Provision for taxation 19.4 25.8 83.5 94.6 75.8 97.9 116.5 118.1 116.5 114.8 113.2
925.5 1073.1 903.3 879.2 906 1192.9 1221.1 1228.1 1232.8 1237.6 1279.9
Non-current liabilities
Trade and other payables 8.1 38.2 34.1 37.5 28.9 23.3 21.9 20.5 19.1 19.1 18.9
Borrowings 605.4 475 587.5 687.5 687.5 487.5 603.2 560.1 622.8 615.0 654.2
Deferred income 6.6 45.1 62.8 41.7 21.3 7.3 30.8 34.8 33.1 28.2 25.9
Deferred tax liabilities 61.2 108.1 112.8 119.2 128.4 127.2 132.9 127.2 129.2 126.0 126.3
681.3 666.4 797.2 885.9 866.1 645.3 788.8 742.6 804.2 788.3 825.2
Total Liabilities 1606.8 1739.5 1700.5 1765.1 1772.1 1838.2 2010.0 1970.7 2037.0 2025.9 2105.1
Shareholders’ equity
Share capital 257.5 260.3 262.8 263.1 271.4 282.6 284.0 291.4 299.2 305.0 310.5
Reserves -131.7 -206.3 -240.2 -219.6 -133.6 -160.8 -172.7 -143.3 -162.9 -182.4 -177.5
Total equity 125.8 54 22.6 43.5 137.8 121.8 111.3 148.0 136.4 122.6 133.0
Source: Company data and Team Estimate
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Appendix C Financial Ratios
Financial Ratios 2011 2012 2013 2014 2015 2016 2017 2018 2019
Profitability Ratios
Sales Growth 3.3% 4.7% -2.1% 0.7% -0.5% 1.8% 2.6% 2.2% 1.7%
Net profit margin 13.65% 14.84% 16.02% 15.52% 15.50% 15.80% 15.70% 15.66% 15.71%
EBITDA margin 29.24% 29.72% 31.36% 31.33% 29.85% 30.25% 30.12% 30.10% 30.18%
Return on equity (ROE) 823.76% 1087.14% 418.64% 285.44% 315.86% 294.64% 274.07% 306.75% 317.15%
Return on assets (ROA) 17.94% 0.203471 0.205619 0.191478 0.185326 0.191336 0.190852 0.189735 0.1904146
Liquidity Ratios
Current Ratio (%) 59.2 70.3 71.2 56.3 57.2189 56.5182 58.38741 58.48416 57.840456
Interest Coverage 21.6413 22.365 25.18617 21.09292 21.47924 22.15907 21.94583 22.90323 23.27264
Efficiency Ratios
Total Asset Turnover 1.341768 1.339157 1.258618 1.201288 1.19587 1.203994 1.195438 1.201696 1.2021171
Solvency Ratios
Debt-to-Equity Ratio 29.31416 15.8046 4.989115 5.644499 6.880429 4.627637 5.209485 5.423716 5.0142418
EBITDA/Interest Expense 32.97561 35.99 39.52128 33.09292 34.62487 35.46771 35.21093 36.75083 37.290529
Market Tests Ratios
Payout Ratios 0.271739 0.239234 0.226244 0.232558 0.234522 0.225938 0.221533 0.217297 0.2129472
Basic EPS(cents) 18.40 20.90 22.10 21.50 21.32 22.13 22.57 23.01 23.48
Price to Book Ratio 0.001855 0.002352 0.002623 0.002527
P/E Ratio 15.76087 18.13397 19.41176 19.30233
Capex to depreciation 0.949904 0.981641 1.111193 1.185841 1.265522 1.330055 1.336955 1.348186 1.3867596
Capex to sales 0.110158 0.112611 0.127785 0.134718 0.14337 0.151016 0.151716 0.152932 0.1573793
Source: Company data and Team Estimate
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Appendix D Forecasted Free Cash Flow
2014 2015 2016 2017 2018 2019
Profit before taxation 456.1 460.12 477.57 487.15 496.49 506.58
Non-cash items & net finance expenses adjustments
256 268.52 267.50 263.99 261.63 260.22
Net change in working capital 8.1 10.87 0.49 6.49 5.95 4.31
Income tax paid -65.3 -69.02 -71.63 -73.07 -74.47 -75.99
Net cash from operating activities 654.9 670.49 673.92 684.55 689.60 695.13
Net cash used in investing activities -318.8 -287.26 -294.17 -301.42 -308.83 -314.59
Net cash used in financing activities -339 -344.72 -342.34 -331.19 -339.63 -339.38
Net change in cash and cash equivalents -2.9 38.51 37.41 51.94 41.14 41.16
Exchange difference on cash and cash equivalents
0.2
Cash and cash equivalents at beginning of the year
266.9 264.20 302.71 340.12 392.07 433.20
Cash and cash equivalents at end of the year 264.2 302.71 340.12 392.07 433.20 474.36
Capital Expenditure (@13% of service revenue) -288.28 -287.25 -294.18 -301.43 -308.84
Free Cash Flow 333.3 382.21 386.68 390.37 388.17 386.29
Assumptions
o All capital expenditure will be at 13% of total service revenue from 2015 to 2019
o Income tax paid will be at 20% of profit before taxation, based on past year rate averages
o Net cash used in investing and financing activities is the moving-average of the previous 3 periods.
o Net change in working capital is the moving-average of the previous 3 periods.
o Assumed no exchange difference on cash and cash equivalents
Source: Company data and Team Estimate
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Appendix E Estimates of future demand
Mobile pre-paid subscriber
Mobile Post-paid subscriber
Cable TV subscribers (k)
Broadband subscribers (k)
2Q12 1104 1069.00 543.00 439
3Q12 1093 1086.00 541.00 443
4Q12 1096 1104.00 536.00 444
1Q13 1104 1113.00 532.00 444
2Q13 1122 1127.00 530.00 442
3Q13 1,129 1151.00 531.00 445
4Q13 1,140 1211.00 533.00 448
1Q14 1,120 1229.00 533.00 451
2Q14 1,049 1243.00 535.00 456
3Q14 1049 1254.00 539.00 461
4Q14 871 1277.00 542.00 469
1Q15 846 1301.00 545.00 473
2Q15 849 1313.00 545.00 475
3Q15 852.50 1309.50 544.00 480.02
4Q15 850.15 1325.60 544.67 483.25
1Q16 850.63 1329.94 544.56 487.55
2Q16 850.86 1341.34 544.41 491.21
3Q16 850.65 1348.50 544.54 495.26
4Q16 850.71 1358.20 544.50 499.07
1Q17 850.72 1366.38 544.48 503.02
2Q17 850.70 1375.47 544.51 506.89
3Q17 850.71 1384.02 544.50 510.81
4Q17 850.71 1392.89 544.50 514.70
1Q18 850.71 1401.57 544.50 518.60
2Q18 850.71 1410.36 544.50 522.50
3Q18 850.71 1419.08 544.50 526.40
4Q18 850.71 1427.85 544.50 530.30
1Q19 850.71 1436.59 544.50 534.20
2Q19 850.71 1445.35 544.50 538.10
3Q19 850.71 1454.09 544.50 542.00
4Q19 850.71 1462.84 544.50 545.90
Assumptions:
o Trend adjusted exponential smoothing is used to estimate the future subscriptions for mobile post-paid and
broadband.
At = α*(Demand this period) + (1 – α)*(Average + Trend estimate last period)
= αDt + (1 – α)*(At–1 + Tt–1)
Tt = β*(Average this period – Average last period) + (1 – β)*(Trend estimate last period)
= β*(At – At–1) + (1 – β)*Tt–1
Ft+1 = At + Tt
Where: At = exponentially smoothed average of the series in period t
Tt = exponentially smoothed average of the trend in period t
α = smoothing parameter for the average, with a value between 0 and 1
β = smoothing parameter for the trend, with a value between 0 and 1
Ft+1 = forecast for period t + 1
o α for mobile post-paid subscription is 0.5 while β is 0.2. Initial trend is 10.
o α for broadband subscription is 0.5 while β is 0.3. Initial trend is 0.5.
o Estimates in pre-paid and cable TV is the moving-average of the previous 3 periods.
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Appendix F Porter 5 Forces Threat of New Entrants 1) High barriers to enter the market 2) Existence of economies of scale 3) High regulatory approval and licensing fee. 4) Access to finance is key to cover high fixed cost Bargaining Power of Suppliers 1) Moderate number of telecommunication suppliers 2) High power supply needs 3) Specialised labour force required 4) Weak position of labour unions in Singapore Bargaining Power of Buyers 1) High number of choices for telecommunication customers 2) Switching costs are relatively low for residential telecom customers, higher for larger business customers 3) Long term supply contracts involved 4) High importance of product to the buyers 5) Moderate product differentiation Competition in the Industry 1) Low HHI ratio indicating low competition 2) Relatively large companies 3) Economies of scale 4) Moderately low product differentiation 5) Capacity augmented in small increments due to growing demand 6) High exit barriers Threat of Substitute Products 1) No perfect substitute 2) All telecommunication companies are involved in broadband service. SingTel and Starhub has cable TV service.
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Reference
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Disclosures: Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making:
The author(s) does not act as a market maker in the subject company’s securities. Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Singapore, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
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