Published August 11, 2009

StarHub special payout on the cards

By WINSTON CHAI

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STARHUB has been quietly building its cash reserves even as credit streams dried up for many companies during the economic downturn. But with its coffers now swelling past normal levels, the market is starting to expect more active capital management measures from the telco once borrowing costs return to pre-crisis levels. If this happens within the next quarter, StarHub shareholders could well be on the receiving end of a small windfall.

Right call: Shareholders are likely to receive a small windfall from StarHub rather than a huge one, given the uncertain future

Telcos like StarHub have the benefit of strong cashflows even in times of economic weakness as most customers will still keep their phone lines and Internet connections. While there are some signs of a migration to lower-end broadband plans, the operator's second-quarter earnings still registered a very respectable 21 per cent improvement to $77.8 million. The company also generated a free cash flow of $263 million for the first six months of the year, a 54.8 per cent jump from a year earlier.

With StarHub choosing not to refinance some of its debt in view of higher borrowing costs, the telco's leverage, or net-debt-to-Ebitda (earnings before interest, taxes, depreciation, and amortisation) ratio, has fallen to a new low of 1.07 times.

StarHub has always maintained that its optimal net-debt-to-Ebitda ratio is 1.5-2 times. During its earnings conference call last week, CEO Terry Clontz also hinted that the company would look into ways of making its 'capital structure more efficient' when credit markets return to normal.

The writing's clearly on the wall that some form of capital management measure is in the pipeline, but the question is what form it would take.

Shareholders will clearly prefer a special dividend payout as the way to return the excess cash, although the company has no history of taking this route.

According to DMG & Partners head of research Terence Wong, the special payout could amount to 12 cents per share or an additional 5 per cent return on top of StarHub's already sizeable 8 per cent yield.

However, based on StarHub's track record, a share buyback or capital reduction could be the more probable option.

Apart from the associated tax incentives, such moves would help to improve earnings per share and return on equity, two common yardsticks for measuring financial performance.

Capital reduction

In 2006, StarHub returned $652 million in cash to shareholders through a capital reduction, cancelling 306 million shares or 14.3 per cent of its issued share capital at the time. The move boosted its return on equity from 23 per cent to 67 per cent as profits were divided by a smaller share capital.

A year later, the operator repeated the exercise by distributing a cash stockpile of $444 million. As a result, its share capital was reduced by another 8.3 per cent. Rivals Singapore Telecommunications and MobileOne have also returned cash to investors by cancelling stock.

Alternatively, StarHub could choose to raise its full-year dividend payout beyond its commitment of 18 cents.

Whatever the form, shareholders are far more likely to receive a small windfall from StarHub rather than a huge one, given that the future is still uncertain.

While the telco will be keen to please shareholders, it will want to maintain some flexibility in terms of capital utilisation.

Top on the list is the $100 million in cash it will sink into its new subsidiary Nucleus Connect over the next five years. This company has been selected by the government to operate Singapore's upcoming fibre-optic broadband highway, and to resell bandwidth to Internet service providers. Once the new network is in place, competition in StarHub's pay-TV and broadband markets can be expected to intensify.

Still, even if it turns out to be a small payout, investors should have no reason to complain. While more would have been better, having half a loaf in these volatile times is way better than having none.