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Starhub: A nibble at $3.85 a share.

Monday, June 29, 2015

Friends would remember that I looked at possibly investing in Starhub a couple of years ago but its high level of borrowings frightened me.

Of course, Starhub has chugged along quite nicely since then and it was only later that I discovered how its very predictable and strong cashflow was able to accommodate its high level of borrowings.

So, I have been waiting for a chance to get some since...

Starhub's stock price plunged today, hitting a price (of $3.70 a share) not seen since late 2012. The big movement downwards was unexpected, of course, although the charts show the 150% Fibo line to be at $3.70, a golden ratio and supposedly a strong support.




I was more expecting a slow drift downwards in price and thought I could, perhaps, buy if the share price hits the 200 week moving average (200W MA) which is currently at $3.87. This is a long term support and should be quite strong.

So, looking at the chart when its share price had already recovered from $3.70 to $3.85, I wondered what to do because breaking the 200W MA is a bearish signal.

The widening of the Bollinger Bands indicates increased volatility. The OBV shows selling pressure. The MACD is declining and shows no sign of a positive divergence. These are all on the weekly chart which suggests that continuing weakness in the longer term should not surprise us.

In the near term, however, share price could rebound as they sometimes do. In fact, the higher low on the MACD in the daily chart suggests that this is a distinct possibility. Such a big one day movement in price should have attracted short sellers and shorts have to be covered eventually.




In terms of fundamentals, it won't be wrong to say that Starhub has challenges. Like SingTel and M1, the other two local Telcos, Starhub must deal with loss of revenue from the more and more popular use of apps such as Whatsapp (please pardon me if I did not get the name right as I don't use this) instead of voice calls and SMS.

Fortunately, Starhub has Cable TV but that business has not been growing much recently. Anecdotal evidence shows that more people are watching free online streaming content. I do that too on my iPad. Japanese anime, remember?

Of course, now, the new threat is the introduction of a fourth Telco in Singapore and this is probably "da bomb". How badly would Starhub's business be affected? I don't know. Would Starhub's ability to pay 20c in dividend per share (DPS) annually be affected? I don't know.

I do know that paying 20c per share annually in dividend means distributing almost all of its earnings to shareholders. So, if its business should suffer a decline in earnings per share (EPS) and this is a real possibility, we could see a reduction in DPS.




I could get a 5% dividend yield if I were to invest in SPH now. Of course, Starhub is not SPH. They are different animals but paying out almost all their earnings as dividends to shareholders make them similar in that respect. They could see earnings come under pressure for different reasons but that makes them similar too as the challenges are very real.

I would like to have some buffer in terms of dividend yield buying into SPH and Starhub because I am investing in them primarily for income and not growth. A more or less predictable 5% dividend yield might be attractive to me but to have a buffer means getting in with a higher yield which means a lower entry price.

Anyway, I decided to nibble at Starhub at $3.85 a share. That gives me a prospective dividend yield of 5.19% which provides a very thin cushion. This is really nothing to shout about and, definitely, I am not expecting to make a lot money with this entry price. From here on, I could, however, buy more if its stock should see more price weakness.

Related post:
How much to invest? Nibbles and gobbles.

33 comments:

dorshii korshii said...

HI AK

2 weeks ago, I sold all except 1 lot of my holdings. I am also looking for a low re-entry price which will give me a bigger margin of safety. I have some apprehension about the management shuffle at the top corporate level. Best of luck to you!

AK71 said...

Hi dorshii,

You still have 1 lot? Then, my exposure is not much bigger than yours. I am with good company. ;p

Fingers crossed. :)

dorshii korshii said...

HI AK:)

Yes, 1 lot left. Often, I leave 1 lot in the CDP account so that I can receive a copy of the Annual Report (sometimes, I keep the CD-Rom). Ha, ha, I am hopeful that we will have the opportunity to scoop more soon. G'day.

Kim said...

Hi AK
Why u choose starhub over M1 and Singtel ??

AK71 said...

Hi Kim,

Both Starhub and M1 have high dividend yields but I feel that Starhub would be less adversely affected by the introduction of a fourth Telco compared to M1. SingTel's yield is a bit lower and its stock price hasn't seen much of a correction compared to Starhub's and SingTel is a bit more complicated to analyse with all its overseas ventures. So, better stick to what I think I understand a bit better. ;p

However, I do have some SingTel shares from donkey years ago, thanks to Mr. Goh Chok Tong. ;p

SuperStuffStartSmall said...

I like to go by this principle, moderate and disputable, "low income is better than no income." I was vested in Starhub but gave it up too soon. Ought to have held on to it for the past decade for it's like the Utility asset in Monopoly - such regular cash flow. Steady, steady win the race.

INVS 2.0 said...

Hi, how do you draw the Fibo retracement lines? Why is that you like to use the 150% line? :)

AK71 said...

Hi INVS 2.0,

Usually, the charting software will draw the lines for us. We just have to choose the highest and the lowest points.

I shan't reinvent the wheel since there are a couple of great articles on Fibonacci to be found in Investopedia:

"When used in technical analysis, the golden ratio is typically translated into three percentages: – 38.2%, 50% and 61.8%...

"...Fibonacci studies are not intended to provide the primary indications for timing the entry and exit of a stock; however, they are useful for estimating areas of support and resistance."


Fibonacci and the Golden Ratio.

Remember, TA is about probability and not certainty. :)

LOL said...

Hi AK,

Sorry, turning away from your post's agenda.

But have you looked at Silverlake Axis before? Would like to see your input on the stock and its current situation if you did.

Thank you!

AK71 said...

Hi LOL,

No, I have not. I heard that its stock price tumbled because of some negative news but it seems to have recovered somewhat since. You have to decide for yourself if the negative news represent a temporary hiccup or a more lasting change to the business.

AK71 said...

M1 will be the most impacted once a fourth mobile operator enters singapore's saturated mobile market.

According to CIMB analyst Foong Choong Chen, M1 is disadvantaged because of its largely Singapore mobile focus and lesser ability to bundle quad-play services.

Once a new operator enters the scene in mid-2017, Foong expects M1's mobile average revenue per user to be impacted by as much as 15% by FY20.

"Similar to the other two Singapore telco incumbents, we expect M1's mobile network coverage/quality to be superior to the fourth mobile operator in the first five years after service launch. However, M1's relatively higher prepaid revenue mix (including IDD calls) and inability to bundle pay TV services in a quad-play offering may put it in a weaker position in defending its market share against the fourth mobile operator," said Foong.


Source:
http://www.msn.com/en-sg/money/personalfinance/m1-will-be-the-biggest-loser-once-a-fourth-telco-enters-the-scene-analyst/ar-AAcM0P7?ocid=LENDHP

Koala said...

Hello Mr. AK,

Interesting post!

Can you do an analysis on the business of Starhub including its moats? Or do you know of any other blogs that have an analysis on Starhub?

Thank you!

AK71 said...

Hi Koala,

There are a couple of sites which have done a good job following Starhub. You might want to take a look at:

6 things investors should learn about Starhub.

and

8 things I learned from Starhub's AGM 2015.

AK71 said...

Two points which I particularly like (taken from the latter link) are:

In 2014, StarHub reported revenue of $2.39 billion which was contributed by five business segments – mobile (52%), pay TV (16%), fixed network (16%), broadband (9%), and sales of equipment (7%). StarHub’s risks are well diversified and the company is not reliant on any single cash-generating engine.

Using debt-to-equity ratio, StarHub is extremely overleveraged. According to the management, a more holistic approach to measure StarHub’s debt position is to compare its net debt against its EBITDA which is less than 1! Simply said, StarHub could pay off all its debts within a year.

Koala said...

Thanks AK for the links! They are indeed informative.

In addition, regarding Starhub's 5 core business segments, do you consider Mobile as their main area that is generating recurring income?

AK71 said...

Hi Koala,

Well, that accounts for half of their revenue. So, yes, it is their most important income generator.

dorshii korshii said...

Hi AK

A member of the Board of Directors sold some shares at $3.94. Read today's SGX announcement.

Kind Regards.

AK71 said...

Overnight BUY order filled at $3.51 a share.

Jing Quan said...

Hi AK,

Great blog and very informative. Thanks for sharing and giving back to society :D

seems like you average down quite alot with this. I have a position of 1 lot on this at $3.91 :( was my first counter i ever bought but I am currently vested with many others along the way to have spare cash to BUY on 24 Aug. Lesson learn like you said. keep some for those rainy days :(

Btw, i was looking at AimsAMP REIT, It was holding well climbing to $1.40 and dropped to $1.345 suddenly at closing. such drastic drop is sure not for the weak heart. any comments on that?

Cheers
JQ

AK71 said...

Hi JQ,

Welcome to my blog. :)

Starhub? Yes, I nibbled again when the price plunged to near $3.50 a share. They will face challenges in future but, like SPH, I doubt Starhub is going the way of the Dodo anytime soon. As the Telco industry is not something I have good knowledge about, I am taking small bites and see how it goes.

AIMS AMP Capital Industrial REIT is still my largest investment in the S-REIT universe. If unit price should go much lower, I might buy some again. This REIT is well managed and some insiders have a significant stake. Just a couple of things I like. ;)

Jing Quan said...

Hey AK71,

thanks for the reply. I decided to nimble some on AIMS AMP its slightly cheaper than it's peak but is 1.36 a fair value? I got a lot in Cache too. I don;t have alot of capital but 1-2lots I can afford. do you still advise on REITS since my capital pool isn't very big as most of my money got stuck at Singtel and Starhub at ultra high positions :(

Just got married and lots of other expenses coming my way. I am more keen on a passive income

AK71 said...

Hi JQ,

I hesitate to say what is fair value because it probably means different things to different people. For an industrial property S-REIT like AIMS AMP Capital Industrial REIT, I feel that an 8% distribution yield is probably a fair enough proposition. At $1.36 a unit, we are looking at slightly more than 8%.

REITs are still relevant tools for income investors. However, bearing in mind that Mr. Market could go into a panic when interest rates are hiked by end of the year, we could see a sell off in S-REITs. Then, we could see higher distribution yields. I would keep a war chest ready.

Taking reference from the Global Financial Crisis when distribution yield for AIMS AMP Capital Industrial REIT came close to 12%, we get an idea of how low prices could go if Mr. Market were to suffer another bout of severe depression.

Jing Quan said...

Well said and rationalize!! Thanks AK...

Martini said...

Hi AK,

If you compare Singtel to Starhub these 2 days, there is almost not much difference between their price. With a lower payout ratio, lower PE ratio and bigger market capitalisation, is Singtel more value for money compared to Starhub? As an income investor, it certain make sense that Singtel broad market diversification give us certain assurance. The 4th telco will probably come online in 2017 or 2018. A lot is expected of the 4th telco so the execution has to be flawless or it will backfire on them. The sheer size of Starhub and Singtel creates a moat to entry for a 4th player. For example, the new bout of funding raise for Myrepublic is US$16Mil which is a small amount compared to Singtel and Starhub revenue. The only lever Myrepublic has is probably unlimited data plan. However, the other telco can and will match whatever they offer. I am posting this because I want to understand your thought process on picking up Starhub and perhaps you see another point of view which I might have missed. Thank you.

AK71 said...

Hi Martini,

It is strange that you should ask this question because I was just looking at the charts earlier this evening. ;)

I don't know how well the 4th Telco is going to do when they start operating. I also don't know how well Netflix is going to do when they start operating. However, if they do chip away at the domestic market share of the incumbent Telcos, it is not going to be in a big way overnight. This is my view. It will take time.

Of course, the Telco industry isn't something I know very much about. I am still learning. I do have a very small position in SingTel which I have been holding since its IPO. That was when then PM Goh wanted all eligible Singaporeans to be shareholders. Through pure luck, it has proven to be one of my good investments for income.

When I looked at the numbers back in June, I was really going for dividend yield. SingTel offered a 4% dividend yield and Starhub offered slightly more than 5%. Starhub appealed to the income investor in me. SingTel appealed to the income+growth investor in me as it pays out about 75% of its earnings and has an obvious growth element.

SingTel with their international exposure is probably a more resilient Telco and with the two stock prices so close to one another, the choice is clear which one I would go for today. SingTel's PE ratio is now about 15x while Starhub's is about 16x.

Having said this, I do see positive divergences in both SingTel and Starhubs' charts. So, there could be a rebound in stock prices. There could be a better time to buy into SingTel in future. I think I shall wait. ;p

Sureshkumar said...

Hi AK, at the current price $3.32 the dividend yield is 6%. you have a better cushion.
Are you buying now?

AK71 said...

Hi Suresh,

I am waiting to see if Mr. Market might offer to me at $3.00 a share. ;p

DO said...

Hi AK,

What are your thoughts on M1, given the recent drop in price?

AK71 said...

Hi DO,

It seems to me that M1's drop in share price is due to deteriorating fundamentals. If the price drop is due to sentiments, all else remaining equal, I would buy some.

Sunny said...

AK

How about Singpost? Ali is coming into Singpost...

AK71 said...

Hi Sunny,

I am in no hurry to buy into Singpost. I might nibble if its share price goes closer to $1.20 a share for a 12x PE. ;p

From:
https://sg.finance.yahoo.com/news/singposts-net-profit-down-41-232200518.html

Higher cost in eCommerce business hurt its earnings. Singapore Post reflected a lower net profit during 2Q17, down 41.2% to $31.4m despite strong revenue increase of 22.3% to $321.7m.

According to the group, this is largely because of higher expenses in its eCommerce business relating to the new new Regional eCommerce Logistics Hub. Loss of rental income from the redevelopment of SPC Mall as well as the decline in domestic mail volumes also badgered its bottomline.

SingPost CEO Mervyn Lim said the group is taking a long term view as it build scale for future profitability.

"While financial benefits will not be immediate, initiatives such as the Regional eCommerce Logistics Hub that was opened on 1 November 2016, as well as our deepening collaboration with Alibaba, will strengthen our eCommerce logistics network for future growth,” Lim stated.

bQ said...

Hello AK, are you buying starhub at current price?

AK71 said...

Hi bQ

I did buy some at below $2.80 a share. ;)

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