Challenging Times Ahead for Starhub’s Dividends
When M1 announced its results in end Jan, I went to buy both M1 and Singtel, but I did not buy Starhub. The conventional wisdom is that between M1 and Starhub, Starhub would be better able to manage the competition from the fourth telco, as it has Pay TV, broadband and enterprise fixed services besides mobile services. That is true provided the other business segments are generating stable, recurrent cashflows. However, is that true?
First of all, let us look at the revenue contribution from its 4 business segments.
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| Fig. 1: Starhub's Service Revenue Breakdown |
Excluding equipment sales, mobile services constitute the bulk of Starhub's service revenue in FY2016, contributing 55% of the revenue. The second largest segment is enterprise fixed services, contributing 18%. Pay TV is third with 17% contribution while broadband services is smallest with 10% contribution. Let us look at the prospects of each business segment.
Mobile Services
Over the past couple of weeks, I have tried to understand the mobile services business by analysing M1, because M1's mobile services constitute 79% of its service revenue and is closest to a pure mobile services company. You can refer to the following blog posts for more information about the mobile services business:
- The Telco Landscape in Singapore
- Telcos From A Consumer's Point of View
- Impact of SIM-Only Plans on Telcos
- Impact of Data Upsize Plans on Telcos
- Can Telcos Stop the Decline in Profitability?
- Do Telco Investors Need to Fear the Fourth Telco?
Generally, based on my assessment of M1, mobile services is facing a decline in revenue due to the introduction of SIM-only plans and data upsize plans in the short run. However, the effects are transient and should disappear in the later half of the year. Over the long run, mobile services is still a viable business despite the threat of the fourth telco.
Pay TV
An entire blog post is dedicated to the analysis of Starhub's Pay TV business in Is Pay TV Still A Reliable Cash Cow? Generally, the Pay TV business is facing intense competition from over-the-top (OTT) providers such as Netflix, CatchPlay, Apple TV, etc. The cost structure for the business is mostly fixed cost for the cable network infrastructure and premium TV content. Thus, the declining Pay TV subscription means that there are less subscribers to spread out the fixed cost. Furthermore, there is also the threat of TV content owners moving away from Pay TV providers to OTT providers. Starhub's response to OTT providers is to roll out similar video on-the-go services, which are priced lower than traditional Pay TV offerings. It also invested in mm2 Asia to acquire locally made video content.
Thus, from the cashflow perspective, there is reduced cashflow as subscribers move away from its Pay TV network and if Starhub continues to make investments in media companies.
Wired Broadband
The wired broadband business can be categorised into cable broadband and fibre broadband. The total no. of broadband subscribers have remained stable in the last 2 years. However, on closer inspection, there is declining subscription for cable broadband, offset by a corresponding rise in fibre broadband subscription. See Fig. 2 below.
If the total no. of subscriptions stays the same, does it matter if one type of subscription is declining while another is increasing? Yes, it matters. As explained in the analysis of the Pay TV segment (see Is Pay TV Still A Reliable Cash Cow? for more details), the cable network infrastructure is a fixed capex cost, thus, the less cable broadband subscribers Starhub has, the less customers to spread out the fixed cost. Although Starhub has raised the monthly rates for cable broadband, that is still insufficient to offset the declining subscription. Fortunately, since the cable TV/ broadband businesses have been in operation for many years already, the infrastructure cost should have been mostly depreciated.
On the other hand, fibre broadband has a variable cost structure. Fibre broadband is provided through the Next Generation Nationwide Broadband Network (NGNBN) which is owned by NetLink Trust. Starhub leases the network capacity from NetLink Trust. Thus, the more fibre broadband subscribers Starhub has, the more money Starhub has to pay NetLink Trust. It is still a profitable business nonetheless, but the profit per subscriber is smaller than for cable broadband.
Moreover, the fibre broadband business is also facing intense competition from other telcos as well as broadband service providers like MyRepublic. M1 and Singtel have to bundle mobile broadband and digital home voice to stand out from the competition.
Thus, from the cashflow perspective, there is reduced cashflow from the wired broadband segment as subscribers move away from its cable broadband network.
Enterprise Fixed Services
Perhaps the only rising star is the enterprise fixed services segment. This segment is a cluster of InfoComm Technology (ICT) solutions such as managed security services and analytics, as well as infrastructure solutions such as data centres and islandwide fibre network. Revenue from this segment has increased by 3.9% in FY2016. However, to earn increasing revenue from this segment, Starhub has to continue to invest to build up the network infrastructure, which is expensive. In Jun 2016, Starhub issued a medium term note of $300 mil. In addition, Starhub has announced that dividends for FY2017 will be cut by 20%.
Moreover, this segment is not without competition. ICT solutions are in direct competition with Singtel, while infrastructure is in direct competition with the NGNBN owned by NetLink Trust and Singtel's own network. Thus, even this bet is not guaranteed.
From the cashflow perspective, this segment will require a lot of capex instead of contributing to the cashflow, at least in the short term while the network infrastructure is being built up.
Conclusion
Going back to the opening paragraph, the conventional wisdom is that between M1 and Starhub, Starhub would be better able to manage the competition from the fourth telco, as it has Pay TV, broadband and enterprise fixed services besides mobile services. Yet from the analysis above, it can be seen that the Pay TV and broadband segments are no longer the reliable cash cows that they used to be. Although enterprise fixed services is a rising star, it is soaking up cashflow at a time when the other 2 business segments are not generating as much cashflow as before. Starhub is facing challenging times ahead.
P.S. I am vested in M1 and Singtel.
Thus, from the cashflow perspective, there is reduced cashflow as subscribers move away from its Pay TV network and if Starhub continues to make investments in media companies.
Wired Broadband
The wired broadband business can be categorised into cable broadband and fibre broadband. The total no. of broadband subscribers have remained stable in the last 2 years. However, on closer inspection, there is declining subscription for cable broadband, offset by a corresponding rise in fibre broadband subscription. See Fig. 2 below.
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| Fig. 2: Starhub's Broadband Subscriptions |
If the total no. of subscriptions stays the same, does it matter if one type of subscription is declining while another is increasing? Yes, it matters. As explained in the analysis of the Pay TV segment (see Is Pay TV Still A Reliable Cash Cow? for more details), the cable network infrastructure is a fixed capex cost, thus, the less cable broadband subscribers Starhub has, the less customers to spread out the fixed cost. Although Starhub has raised the monthly rates for cable broadband, that is still insufficient to offset the declining subscription. Fortunately, since the cable TV/ broadband businesses have been in operation for many years already, the infrastructure cost should have been mostly depreciated.
On the other hand, fibre broadband has a variable cost structure. Fibre broadband is provided through the Next Generation Nationwide Broadband Network (NGNBN) which is owned by NetLink Trust. Starhub leases the network capacity from NetLink Trust. Thus, the more fibre broadband subscribers Starhub has, the more money Starhub has to pay NetLink Trust. It is still a profitable business nonetheless, but the profit per subscriber is smaller than for cable broadband.
Moreover, the fibre broadband business is also facing intense competition from other telcos as well as broadband service providers like MyRepublic. M1 and Singtel have to bundle mobile broadband and digital home voice to stand out from the competition.
Thus, from the cashflow perspective, there is reduced cashflow from the wired broadband segment as subscribers move away from its cable broadband network.
Enterprise Fixed Services
Perhaps the only rising star is the enterprise fixed services segment. This segment is a cluster of InfoComm Technology (ICT) solutions such as managed security services and analytics, as well as infrastructure solutions such as data centres and islandwide fibre network. Revenue from this segment has increased by 3.9% in FY2016. However, to earn increasing revenue from this segment, Starhub has to continue to invest to build up the network infrastructure, which is expensive. In Jun 2016, Starhub issued a medium term note of $300 mil. In addition, Starhub has announced that dividends for FY2017 will be cut by 20%.
Moreover, this segment is not without competition. ICT solutions are in direct competition with Singtel, while infrastructure is in direct competition with the NGNBN owned by NetLink Trust and Singtel's own network. Thus, even this bet is not guaranteed.
From the cashflow perspective, this segment will require a lot of capex instead of contributing to the cashflow, at least in the short term while the network infrastructure is being built up.
Conclusion
Going back to the opening paragraph, the conventional wisdom is that between M1 and Starhub, Starhub would be better able to manage the competition from the fourth telco, as it has Pay TV, broadband and enterprise fixed services besides mobile services. Yet from the analysis above, it can be seen that the Pay TV and broadband segments are no longer the reliable cash cows that they used to be. Although enterprise fixed services is a rising star, it is soaking up cashflow at a time when the other 2 business segments are not generating as much cashflow as before. Starhub is facing challenging times ahead.
P.S. I am vested in M1 and Singtel.
See related blog posts:
