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Monday, October 10, 2005

Starhub @ 2.00 ( Telco / Singapore ) 6 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.High valuation at 25X forward PE compared to Singtel; strong growth doubtful given mature local market

2.New and more aggressive depreciation policy

3.Possible further Temasek placements looming

It's about time the bull run of Starhub came to an end. It has charged up from less than $1 less than a year ago to above $2 recently, on the back of its successful "hubbing" concept triggering a turnaround to an interim net profit of S$80M.

But the valuations seem stretched. The other two telcos in Singapore, Singtel and M1, are trading at about 15 times PE. Starhub, on the other hand, is trading at a n estimated forward PE of about 25 times, if I may take the liberty of annualising its earnings based on its 1H05 results. One may look at its 1Q05 profit of S$30M, compare with its 2Q05 profit of S$50M and claim that it's not fair to annualise since profit has grown quarter-on-quarter. However, note that Starhub adopted a (more aggressive) depreciation policy of capitalising key assets over 8 years instead of 5 years previously, and this added ~$20M to its 2Q05 profits. Hence operating profits really did not improve much quarter-on-quarter at all.

A rule of thumb to gauge whether a given PE is reasonable is to compare it with the company's projected long-term earnings growth rate (in %). This is a measure introduced by Peter Lynch, called the PEG (P/E vs earnings growth) ratio. A PEG ratio more than one (ie. P/E is higher than percentage earnings growth rate) is a danger sign. Unless one feels Starhub is going to grow profits every year by 25%, one should not buy now. What are Starhub's key businesses? Mobile, cable TV, broadband and fixed line. Mobile comprises 50% of revenue; seriously, does anyone think the Singapore market is going to grow at a 25% clip every year? Starhub has to take market share from the other two players, and such competition usually leads to margin squeeze and benefits the consumer instead. Its pre-paid card concept was successful but the other two players have been muscling into this territory recently. Cable TV and broadband seem to be strong domains of Starhub and have contributed to its "hubbing" concept, but according to the FY04 report these two segments combined actually made losses of $30M on $300M revenue. The interim 05 results did not indicate segmental profits. As for fixed lines.... seems like an obligatory service to IDA to me.

Unless there are some fundamental changes in the Singapore telco industry, say a boom in 3G or data services which increases the pie substantially for all players, I would not venture into the stock at its current price. Look at Mediacorp, they have already placed out half their stake (from 13.6% to 7.6%), a massive 130 million shares. I would have thought Mediacorp would have the most reason to hold a stake that would be deemed strategic, particularly in Starhub Cablevision. Perhaps their selling is due to a potential conflict of interest. Perhaps it is profit taking purely. Anyway, their placement managers CSFB will ensure the market price for Starhub remains strong in the short to medium term; that's how it works. But looking further, there are already signs that Temasek plans to divest non-core holdings so that it can execute its 1/3 local-2/3 overseas investment strategy. To me, that is already a strong reason not to buy Starhub, which fits into the non-core category. And to me, that seems a possible reason for Starhub's price rise these few months.... sometimes, the financial statements don't tell the whole story.




Anonymous Anonymous said...

Hi Daniel, I totally agree with me and admire your insightful analysis.

Appreciate your opinion on Sarin Technology, if you do have some study. Thanks.

10/11/2005 9:10 PM  
Blogger DanielXX said...

Hi anonymous,
Sarin is trading at ~20 times trailing PE but probably closer to 10 times forward PE, looking at its 1H results. It would hardly be a candidate for this blog site (which warns against overvalued stocks) but then again I wouldn't buy it simply because it is trading too high above NTA, and more importantly it has just IPOed; no track record.

10/11/2005 10:33 PM  
Anonymous Cheras said...

Very good article. In fact, was looking at the counter last week and couldn't find any growth story in the near term.


10/12/2005 8:34 AM  
Anonymous Quest said...

"However, note that Starhub adopted a (more aggressive) depreciation policy of capitalising key assets over 5 years instead of 8 years previously, and this added ~$20M to its 2Q05 profits"

i would like to point out that capitalising(or depreciating) assets over a shorter period of time results in increased depreciation expenses per period, not less.

10/12/2005 10:12 PM  
Blogger DanielXX said...

Hi quest, thanks for pointing out my mistake. I have corrected it on my blog already, in case anyone reads it without reading your correction.
The point remains valid; I accidentally swapped the two figures. Starhub's depreciation policy is now 8 years, compared to 5 previously. Hence annual depreciation expense will be lower.

10/12/2005 11:10 PM  
Anonymous quest said...

you are most welcome!
just doing my bit.
i enjoy reading your works.

10/13/2005 8:11 PM  

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