StarHub Ltd’s Stock Is Trading Near A 52-Week Low: Does The Company Have A Quality Business?
StarHub Ltd (SGX: CC3) is a company that probably needs no introduction, given that it is one of Singapore’s main operational telcos.
At the current price of S$2.29, the company’s stock is just 1.3% higher than a 52-week low of S$2.26. This captured my attention and got me interested in finding out more about the company. In particular, I want to understand: Does it have a high quality business?
This question is important. If StarHub has a high quality business, its current low stock price could be an investment opportunity. Unfortunately, there’s no easy answer to the question. But, a simple metric can help shed some light on the question: The return on invested capital (ROIC).
A brief introduction of ROIC
In a previous article of mine, I explained how the ROIC can be used to evaluate the quality of a business.
The simple idea behind the ROIC is that a business with a higher ROIC requires less capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business. High-quality businesses tend to have high ROICs while the reverse is true – a low ROIC is often associated with a low-quality business.
You can see how the math works for the ROIC in the formula above.
Here’s a table showing how StarHub’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2017):
Source: StarHub earnings update
In 2017, StarHub generated a ROIC of 77.1%. This means that for every dollar of capital invested in the business, StarHub earned 77.1 cents in profit. The company’s ROIC is way above average, based on the ROICs of many other companies I have studied in the past. This suggests that Starhub has a high quality business.
Nevertheless, there are two things that investors should note about StarHub’s ROIC. Firstly, the company had significant intangible assets on its balance sheet at the end of 2017 (S$557.6 million), which is common among telecom companies. Secondly, the company also had S$120 million in short-term borrowings. Both are excluded in the calculation of the tangible capital employed above.
If I adjust for the two things mentioned earlier, StarHub’s adjusted ROIC would be 30%. This is significantly lower than the 77.1% figure I calculated above, but it’s still a very respectable number.