Archive for August, 2011

Really short post.

I have noticed that the share price of Starhub has been rising significantly in the recent weeks, and that quite a few people have been recommending Starhub based on its yield.

Although I think the company is fundamentally sound, I feel that investors are focusing too much on the yield and ignoring the valuations.

Currently SH trades at a PE ratio of 18.65. Owner Earnings (Reported Earnings + Depreciation, Amortization & Other Non Cash Items – Capital Expenditures), which is similar to Free Cash Flow was 250.3 Million in 2010.

With its market cap of roughly 5 billion, it gives it a Price/Owner Earnings Ratio of about 20.

What I find more disturbing is that Starhub paid out 343.1 Million in dividends in 2010. It earned 4 & 4.54 cents per share in the first and second quarter this year, yet paid out 5 cents per share in dividends.

Although the company is sound, their current commitment to their current payout puts them in a bind – seeing that they are bring far less cash than they can pay. I did a check for the large telecoms both in Singapore and in the US, and Starhub is the only company which I found which is doing so. The only way I see this is possible is that they are borrowing more money than they are bringing in to pay shareholders – something which I find quite puzzling.

My thesis is that Starhub will drop significantly in the event that they reduce their dividend payout for whatever reason. However, I don’t see this as something that will happen anytime soon, considering its relatively entrenched position as one of the leading telecoms in Singapore. However, raising its dividend yield anywhere in the near future looks impossible (not to mention irresponsible).

At this price, I believe Starhub is trading at a slight premium to its intrinsic value, offering in my opinion, little margin of safety to investors.

As Seth Klarman said - “Dont be a yield pig”.

[Not vested in Starhub]

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