Starhub on its way to recovery?

Last quarter, I blogged about Shit to Gold - Starhub on its way to recovery. Yesterday, Starhub announced a business performance update for Q1 2020. Hence, I decided to continue track Starhub's progress, especially during this difficult time amidst a virus pandemic.

Overall, the performance displays the immense challenges facing the telco business but there is some consolation from a slight improvement and stabilization in the financial position of Starhub.

Highlights:
Revenue decreases 15.2% to $506.2m
Q1 2020 Net Profit decreases 25.7% to $40.2m
Q1 2020 Net Profit actually increases 20% q-o-q from $33.3
Q1 2020 Free Cash Flow increases to $118.9m
Continued declines in Revenue and ARPU for Mobile, Pay TV and Broadband
Continued growth in Revenue from Enterprise and Cybersecurity
Received 5G license from IMDA on 29 Apr 2020
Financial reporting is changed from quarterly to bi-annually so dividends payout will no longer be quarterly

Having shared before, Starhub is one of my initial investments when I started to build a long-term investment portfolio. At that time, telcos were defensive businesses paying good dividends however with the emergence of more competition from virtual mobile operators offering cheaper mobile and broadband services, and evolution of Pay TV landscape to online streaming such as Netflix, the main business of telcos have eroded and margins get squeezed.

If Starhub is able to maintain a free cash flow of above $200m for FY2020, they can sustain paying a dividends of 9 cents per share. However, I feel that if they further cut their dividends to 6 cents per share, they would be more comfortable. I have almost write off this telco investment and no longer places high hopes on Starhub's recovery.

In fact, I have sold off my Singtel (SGX: Z74) shares in Nov 2020 and switched to Ascendas Reit (SGX: A17U) when the latter announced the acquisition of 30 business parks in US, which I believed will have more growth in the future than Bharti Airtel in India. It was a strategic rebalancing move that I was happy to make.

In the near future, the prospects of enterprise and cybersecurity business in Singapore still seems rosy but they are not enough to offset the wading main mobile, Pay TV and broadband business.
The acquisition of 5G license should mark the beginning of a new digital 5G era in Singapore and the region. Telcos should need to pump in more Capex expenditure and it will be a long journey before 5G starts to bear fruits.

I still believe that the route to recovery of Starhub will take at least 5 to 10 years. It will continue paying dividends but there is a decent possibility of further cuts in the dividends. I will continue holding it but I am also contemplating cutting losses and shift the investment into more resilient assets such as Mapletree Industrial Trust (SGX: ME8U) and Frasers Logistic & Commercial Trust (SGX: BUOU) which I mentioned in the following recent posts.

Nibbled Mapletree Industrial Trust but sold it off after results announcement

Addition of Frasers Logistics & Commercial trust

Thanks for reading.

Love & Peace,
Qiongster