Investing in Starhub at the right price?

My investment in Starhub has turned out to be a bad one.

However, I am not losing sleep over this.

Why? Is it because I am on anti-depressants?

Hey, don't be so like that lah.

I stop taking those pills a long time ago.






I am quite ZEN about the paper loss really because my investment in Starhub is very small especially in comparison to my investment in SingTel which has been, of course, my preferred local Telco to invest in for quite a while now.

To give you a rough idea, the market value of my investment in Starhub is less than 2% the market value of my investment in SingTel.

Although I have been adding to my investment in SingTel as its share price declined in recent months, I have not added to my investment in Starhub even as its share price plunged.

Why is this so?

SingTel has a stronger balance sheet, stronger free cash flow and it pays out a fraction of its earnings as dividends to shareholders.

Starhub, on the other hand, has seen its free cash flow declining in recent years and it pays out much more than its free cash flow as dividends to shareholders.

Although Starhub has cut DPS from 20c to 16c, I think, if the management is financially prudent or unless business improves dramatically however unlikely, DPS should be cut again.




I did the numbers some time back and again more recently. I now feel that a more sustainable DPS could be 10c, assuming things do not get much worse.

So, if we choose to invest in Starhub today for income, we should ask ourselves if a DPS of 10c would make us happy?

I received quite a few messages from readers regarding Starhub recently. Examples:

Assuming that Starhub pays all of its cash flow to shareholders as dividends, I feel that it behaves very much like S-REITs.

Hanging on to that idea, if we can get a dividend yield of 7% or more from Starhub which is probably comparable to what we can get from industrial S-REITs, it is not too bad a deal.

Assuming a lower 10c DPS, even at $1.70 a share, we are looking at a dividend yield of 5.88% which doesn't quite cut it for me even with this new perspective.




Investing in Starhub for income?

Closer to $1.40 a share could be a more reasonable price to pay, I feel.

At $1.40 a share and assuming a more sustainable DPS of 10c, dividend yield would be 7.14%.

What if $1.40 does not happen?

No problem because I would rather invest in SingTel at the current price than to invest in Starhub at the current price, everything taken into consideration.





Looking at the chart, the RSI shows that Starhub is very oversold but like the MACD, the momentum oscillator does not show any sign of a trend reversal.

Although Starhub's share price plunged 5% (- 9c) today to $1.67, we could see it going lower if Mr. Market shares my sentiments.

Things could get worse before they get better.

So, why have I not been adding to my investment in Starhub?

Alamak. I anyhow talk to myself only lah.

You blur? I also blur.

Investing in Raffles Medical Group.

I revealed earlier in the year that I have a few hundred drafts in my blogging account, these are blogs which I started and did not finish.

It is terrible, I know.

There were always so many things going on in my mind and I am sure they contributed to my sleeping problem in the past.

Things have improved for me on the mental health front as I try not to think too much these days.

Anyway, this blog on Raffles Medical Group (RMG) was one of those drafts. 

It was more than a year ago when I started this.

OK, enough rambling.

When I looked at RMG together with Healthway Medical many years ago at around the time of  the Global Financial Crisis, RMG's historical PE ratio was 21x.

That provided a guide for me as to what might be a fair price to pay for a stake in RMG today if there has not been any major changes to its business.

With a PE ratio of about 33x in early 2017, I decided that RMG definitely wasn't cheap.





I thought if its share price should decline by a third, we would see a price movement approximately to its mean.

At the time in early 2017, RMG was trading at about $1.50 a share.

So, a one third decline in share price would give me a target buy price of $1.

Pay $1.50 a share?

Not for me.





Investors who invested in RMG at a PE ratio of 30x or higher had to expect RMG to register phenomenal growth in earnings year after year.

Otherwise, why would they value RMG so highly?

Personally, I could not see phenomenal growth in RMG's earnings happening especially with all the capital expenditure (CAPEX) and also the expected increase in operational expenditure (OPEX).





As RMG's share price plunged over time, I received emails from some readers who asked me to talk to myself but I declined.

They should talk to themselves and ask why did they invest in RMG at higher prices?

Were they investing for growth or were they speculating?





Believing that RMG would deliver phenomenal growth in earnings and accepting a very high PE ratio, they should understand that if growth should falter, Mr. Market could go into a depression.

This is a key risk factor when paying prices which reflect high expectations for growth and this is usually represented by a high PE ratio.

Of course, Mr. Market's optimism could create opportunities for investors of the more patient variety who prefer getting more value for money.

After all, the swing from optimism to pessimism could be quite dramatic and we really should be buying when Mr. Market is feeling pessimistic.





Don't blame the analysts, professional or amateur (including bloggers).

Good or bad, they probably had their plans.

Ask what is our plan?

The truth is RMG is facing some challenges.





With medical tourism in Singapore facing stiff regional competition and ongoing CAPEX with attending start up costs to be seen in their new Chinese hospitals through 2018 and even 2019, earnings at RMG would probably take not one but several hits.

It would, therefore, be a good idea to demand a bigger margin of safety which, of course, means demanding a lower entry price, everything else remaining equal.





Although RMG has a good track record of growing value for shareholders over the years, if we want a better outcome for our investment, it would make sense to pay a more reasonable price.

What is a more reasonable price?

Regular readers know that one method I use is to compare with crisis valuation to help determine if a stock is cheap.





RMG's lowest PE ratio was about 14x. This was during the GFC (2009). So, assuming earnings bottom at 4c a share, at about 56c a share, RMG would hit crisis valuation.

Not expecting another GFC, I decided that paying anything below its historical mean (21x) is probably a bargain.

So, paying anything below 84c a share should provide me with a good starting point.





In September 2017, when RMG hit $1.03 a share, I thought it was still expensive. 

Assuming an EPS of 4c, PE ratio was almost 26x.

Of course, Mr. Market didn't care what I thought and RMG saw its share price recovered.





I decided then that perhaps I should not wait for 84c and that I could nibble if it should ever touch $1 a share (i.e. PE ratio of 25x)

A PE ratio of 25x is significantly lower than 33x but, to be honest, I would still be buying into the expectation that RMG's Chinese investments would do well and lift earnings in a spectacular fashion in future.

If nothing goes terribly wrong, perhaps, the year 2020 is when earnings would improve more meaningfully for RMG.





So, investing in RMG now is to invest in growth but expectations should be realistic.

At $1 a share, dividend yield is about 2%.

So, it probably wouldn't appeal to the purist income investor. 





I got my foot in the door by paying $1 a share but unless the price goes lower from here, I am keeping my investment relatively small.

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