by: Tam Ging Wien
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Asian Pay TV Trust (APTT) released its Q3-2018 on the 14-Nov-2018 guided that the DPU for year 2019 and 2020 would now be revised to 1.20c down from 6.50c a massive 81.5% drop in DPU!
ProButterfly covered APTT results as well as cash flow situation in our article dated 19-Nov-2018 entitled Learning the Lessons from Asian Pay TV Trust (APTT) – Avoid Companies with Unsustainable Dividends.
In the article, we discussed the concept of Free Cash Flow and how APTT has been paying unsustainable dividends above its Free Cash Flow since FY2014. We suggest that readers reference the above article for a better context and analysis of APTT cash flow situation.
This week, we look at another company that also has been paying dividends above its Free Cash Flow – StarHub Ltd.
We have previously covered StarHub in our article dated 21 Feb 2018 entitled Is StarHub Borrowing to Pay Shareholders Dividends?. We now take another look at StarHub again 9 months later.
We observe from the chart above that StarHub has been showing declining Operating Profit, Net Profit and EBITDA since FY2014. Its Operating Cash Flow trend has also followed suit.
For completeness, we will observe the Operating Profit, EBITDA and Operating Cash Flow for all 3 Singapore telcos to see if this downtrend in profitability has affected all telcos equally. Specifically for SingTel, we had to adjust its FY2017/18 figures to remove the exceptional divestment of NetLink Trust which ProButterfly has covered fairly extensively during the IPO.
From observation, it seems that all 3 telcos are somewhat impacted, however StarHub seems to show the most pronounced decline of the 3. Clearly, the competitive landscape of Singapore’s telco industry has been weighing heavily on StarHub’s profitability and cash flow.
Using the same method that we have covered in our article on Asian Pay TV Trust (APTT), we plot StarHub’s Operational Cash Flow, Free Cash flow and Dividends Paid.
In an eerily similar trend to APTT, StarHub has also been paying dividend above its Free Cash Flow since FY2013. In FY2017, StarHub cut its 20c to 16c per share, representing a 20% decrease in dividends for shareholders. However, from the chart above, it is clear that the cut is still not sustainable.
If StarHub does not start to start to push its free cash flow higher, we see another potential dividend cut coming in 2019/20.
As a result of this unsustainable dividend payout, StarHub has been increasing its debts since FY2015. In affect, it has been borrowing to pay the dividends! Fortunately, the debts have not increased from FY2017 to FY2018 which indicates to use that StarHub is at least halting the rapid debt increase.
But of course, there is no free lunch. Without taking on higher debts to finance its high dividend payout, it would need to dip into its cash balance. As shown in the chart below, the cash balance took a dip in the 9 months ending FY2018.
Again just to be complete, let’s quick look at the cash flow and dividend trends for SingTel and M1.
Observing the charts below, we can see that SingTel has been paying dividends very very close to its free cash flow. The difference that they are paying out seems to have been compensated by a large free cash flow influx in FY2018. This is due to a significant reduction of CAPEX in H2-FY2018/19 compared to H2-FY2017/18.
Going on to M1, we can see that in FY2014 and FY2015, there was a significant gap between the Free Cash Flow and the amount of dividends paid out. M1 clearly has reduced their dividend paid in FY2016 and FY2017 to match it Free Cash flow. With increase in Free Cash Flow in FY2018, M1 increased the dividend being paid out. Overall, it would seem to use that M1 is constantly adjusting their dividends to ensure that it is sustainable.
StarHub on the other has attempted to reduce its dividends starting in FY2017. However that does seem like it’s enough and would likely need to reduce its dividends one more time similar to how M1 adjusted their dividends to maintain sustainability.
Another way to look at dividend sustainability is to look at the company’s Free Cash Flow-to-Dividend Ratio (FCF/Dev Ratio). In an ideal state, we would want our investments to consistently have a FCF/Dev Ratio above one. Unfortunately, none of the 3 telcos show that trend which we found a little disappointed.
Across a 5 year average however, it would seem that SingTel has managed to average the FFC/Dev Ratio above one which indicates that on a net basis over 5 years, SingTel has been able to maintain dividend sustainability.
M1 managed a 0.905 FFC/Dev Ratio average. What this means is that despite the last 3 years of Free Cash Flow above its dividend paid, it has still not been able to in absolute terms recovered back the overpayment of dividends in FY2014 and FY2015.
StarHub on the other hand has consistently paid dividends above its Free Cash Flow for the last 5 years resulting in a low FFC/Dev Ratio average of only 0.756. This is despite adjusting its dividend downwards in FY2017. Going forward, we think that StarHub would probably need to stop this cash bleed and revise the dividends downwards one more time.
Based on our observation of the cash flow and dividend payout patterns, we conclude the following about each of the three telco over the last 5 financial periods:
We maintain our view that unless StarHub is able to increase its Free Cash Flow, it would likely need to cut its dividends sometime in FY2019/20.
Both SingTel and M1 on the other hand are practically paying out all its free cash flow and dividends with little retention of the cash. SingTel currently has a cash balance of $706.9mil while M1 and StarHub as a cash balance of $86.5mil and $249.6mil respectively.
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