Since then Starhub has reduced its dividend policy to 16 cents annually. This means Starhub has to generate $277 Mil of cash to deliver its 16 cents dividends.
What has happened?
Since then, Starhub has experienced 2 events.
Firstly, the issuance of a s$200 mil perpetual securities with a 3.95% yield. In my opinion, the proceeds from this perpetual securities is likely to be used for to repay Starhub's maturing debts such as its Sept 2022 bonds. Hence, it is likely this perpetual securities is used as an instrument to roll over Starhub's debts to a longer duration.
Secondly, Starhub has experienced a deterioration in its business environment and erosion of its moat. In its recent Q2 results, Starhub experienced a net profit drop of 20%. Its pay TV and mobile segments saw a fall in revenue and user subscription. Fortunately, Starhub's cash generation ability did not deteriorate by 20% in tandem. From the results, Starhub's operating cash flow before working capital changes for the first half of the year was s$339 million; and if we are to extrapolate it on an annual basis, the company is generating about s$678 million per year.
|Starhub's cash flow Statement as of Q2FY2017|
Are the New Dividends Sustainable?
So to recap, Starhub now needs a free cash flow of s$277 mil to support its dividends. With an extrapolated cash flow generation ability of s$678 mil, we will have to deduct the following few cash outflow items first:
i) Maintenance Capex - s$300 mil (based on past annual reports)
ii) Income Tax of about s$60 mil
iii) Finance Expense of s$30 mil (based on Q2 results)
iv) Annual distribution to perpetual holders of s$7.9 mil
In addition, I have estimated that Starhub will be receiving about s$10 million in government grants. This is about a 66% fall from previous FY but a rather fair estimate as seen in its cash flow statements
|Starhub Q2 cash flow Statement (Financing Activities)|
To conclude, it seems Starhub has just about sufficient cash flow to support its current dividends. However, with such a huge amount of debt in its balance sheet and the increasing competition experienced in the mobile segment, it may be prudent for Starhub's management to re look at its dividend policy. Perhaps one good way is to announce that the company will distribute 90% of its free cash flow instead of guiding for a fixed amount of dividends it will give on a yearly basis.