Stable Dividend Play
Presented by:
Kenny Ong
Disclaimer
The objective of the presentation is for educational purposes.
The full content of the presentation is for illustration purposes
only and should not be used as investment recommendations.
AB Maximus and its presenters are not responsible for all
investment activities conducted by the participants and cannot
be held liable for any investment loss.
The company and presenters may have personal interest in the
particular shares presented.
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Our take on Starhub’s future growth
prospects
Trading Value: S$4.45
Market Capitalization: 7.61B
Market Price
Target Price
4.53
4.40
*Source: Yahoo Finance
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
House model to understand Starhub’s
valuation
Valuation of Starhub
Sustainable
Business
Segments
Defensive
Income stock
Confirmatory
valuations
Questionable Risk Profile
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Section:
st
1 Pillar of
Success
Starhub as a Defensive Income Stock
B
S
C
House model to understand Starhub’s
valuation
Valuation of Starhub
Sustainable
Business
Segments
Defensive
Income stock
Confirmatory
valuations
Questionable Risk Profile
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Starhub is a Defensive Income Stock
Defensive Stock
-
Constant dividend and stable earnings
Regardless of the cyclical conditions of the market
Calculation of
BETA
Regression
Beta
1. Historical
Method:
Regression BETA
0.54
*Source: Bloomberg
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Starhub is a Defensive Income Stock
IncomeStock
-
Comparatively high and regular dividends
Often issued by blue chip or firms with stable
earnings
Trend Analysis
Starhub's Dividend Payout Ratio
150%
100%
50%
0%
2005 2006 2007 2008 2009 2010 2011 2012
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Starhub is a Defensive Income Stock
Defensive Stock
-
Not as affected as other
stocks in general when
there are cyclical conditions
Stock’s
Characteristics
Business
Segments
IncomeStock
-
DCF Valuation
Investors can expect steady
dividends as promised by
management
Relative Valuation
Risk
Conclusion
Section:
nd
2 Pillar of
Success
Sustainable Business Segments
B
S
C
House model to understand Starhub’s
valuation
Valuation of Starhub
Sustainable
Business
Segments
Defensive
Income stock
Confirmatory
valuations
Questionable Risk Profile
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Breaking down Starhub’s business
into its 5 revenue segment
Mobile
Service
Analysing Starhub’s individual
segment’s contribution to revenue
Pay TV
Mobile Service
Revenue
8%
Pay TV Revenue
14.8%
Broadband
Fixed
Network
Services
50.5%
10.3%
16.4%
Fixed Network
Services Revenue
Sale of Equipment
Equipment
Sales
Stock’s
Characteristics
Broadband Revenue
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Mobile Service
Mobile
Service
1
-
-
-
Removal of
plans with
unlimited usage.
Data caps fall
from 12gb to
2gb.
ARPU to
increase by 1-3%
*Source: DBS Vickers
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Mobile Service
Mobile
Service
2
-
-
Market
penetration rate
of smart phone
stands at 88%
Projected to
grow with rising
affluence,
population
Stock’s
Characteristics
*Source: IDA, OIR
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Mobile Service
Mobile
Service
1.2
Favourable
x 1.2
Revenue:
Growth Rate
Applied:
2012
$1,224
2013E
$1,310
2014E
$1,391
2015E
$1,463
2016E
$1,526
2017E
$1,578
7.03%
6.13%
5.22%
4.31%
3.41%
2.50%
Adopt a linear decrease in high growth rate to stable growth rate (2.50%)
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Pay TV
Pay TV
1
2
-
Starhub to
slowly lose its
viewership
segment for
non-sports
content to
Singtel
Stock’s
Characteristics
3
-
Business
Segments
Threat from
rising costs of
content, evident
from BPL’s
increase from
$300m (‘09) to
$400m (‘12)
DCF Valuation
-
-
Threat from
over-the-top
players
With faster
internet speed,
overseas players
such as Netflix
are expected to
enter market
Relative Valuation
Risk
Conclusion
Pay TV
Pay TV
0.8
Unfavourable
x 0.8
Revenue:
Growth Rate
Applied:
2012
$396
2013E
$416
2014E
$434
2015E
$451
2016E
$466
2017E
$480
4.85%
4.38%
3.91%
3.44%
2.97%
2.50%
Adopt a linear decrease in high growth rate to stable growth rate (2.50%)
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Fixed Network Services
Corporate Data Space
Fixed
Network
Services
<20%
1
-
-
With aCAPEX of
$100m,Starhub
wired up more
commercial
buildings in 2012
Increased
partnerships with
SME’s in data
mining services
Stock’s
Characteristics
Singtel
Starhub
80%
Business
Segments
DCF Valuation
Relative Valuation
Others
Risk
Conclusion
Fixed Network Services
Fixed
Network
Services
1.2
Favourable
x 1.2
Revenue:
Growth Rate
Applied:
2012
$357.7
2013E
$388
2014E
$416
2015E
$442
2016E
$463
2017E
$480
8.49%
7.29%
6.09%
4.89%
3.70%
2.50%
Adopt a linear decrease in high growth rate to stable growth rate (2.50%)
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Section:
rd
3 Pillar of
Success
Confirmatory Valuation:
B
S
C
DCF Valuation
House model to understand Starhub’s
valuation
Valuation of Starhub
Sustainable
Business
Segments
Defensive
Income stock
Confirmatory
valuations
Questionable Risk Profile
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Discounted Cash Flow Model
Selection
Company Fundamental Characteristics
High Dividend Payout
Stable Growth Firm
Dividend
Discount
Model
Stable Dividends
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Key Components of the DDM
Dividend
Discount
Model
Earnings Per Share
(EPS) Projections
Cost of
Equity (Re)
Stock’s
Characteristics
Business
Segments
2-Stage Growth
Model
Stable Growth
Rate (g)
DCF Valuation
Relative Valuation
Risk
Conclusion
DCF Valuation: Dividend Discount
Model
Cost of
Equity
CAPM Model
re = rf + β(rm – rf)
EPS
Projection
Risk-free Rate, rf
2.2%
Stable
Growth
Rate
Market Return, rm
2-Stage
Growth
Model
Stock Beta
Stock’s
Characteristics
Business
Segments
DCF Valuation
(SG-Govt 15 Yr Rate)
10%
(5 Year STI Average Return)
0.54
(Regression Beta)
Relative Valuation
Risk
Conclusion
DCF Valuation: Dividend Discount
Model
Cost of
Equity
CAPM Model
EPS
Projection
Cost
Risk-free
Rate,of
rf
Stable
Growth
Rate
Market Return, rm
2-Stage
Growth
Model
Stock Beta
re = rf + β(rm – rf)
2.2% )
Equity
(R
(SG-Govt 15eYr Rate)
6.5%
Stock’s
Characteristics
Business
Segments
DCF Valuation
10%
(5 Year STI Average Return)
0.54
(Regression Beta)
Relative Valuation
Risk
Conclusion
DCF Valuation: Dividend Discount
Model
Applying the 7-year historical average Net Profit Margin = 15.03%
Cost of
Equity
EPS
Projection
Stable
Growth
Rate
2-Stage
Growth
Model
Segment Earnings Analysis
(Millions)
Mobile Service
Revenue:
Net Contribution:
Pay TV
Revenue:
Net Contribution:
Fixed Network Services
Revenue:
Net Contribution:
Broadband
Revenue:
Net Contribution:
Equipment Sales
Revenue:
Net Contribution:
Stock’s
Characteristics
Business
Segments
2012
$1,224.2
2012
$396.3
2012
$357.7
2012
$249.4
2012
$194.0
DCF Valuation
2013E
$1,310
$196.9
2013E
$416
$62.4
2013E
$388
$58.3
2013E
$259
$39.0
2013E
$217
$32.7
2014E
$1,391
$208.9
2014E
$434
$65.2
2014E
$416
$62.6
2014E
$269
$40.4
2014E
$239
$36.0
Relative Valuation
2015E
$1,463
$219.9
2015E
$451
$67.7
2015E
$442
$66.4
2015E
$278
$41.8
2015E
$259
$38.9
Risk
2016E
$1,526
$229.3
2016E
$466
$70.1
2016E
$463
$69.6
2016E
$287
$43.1
2016E
$275
$41.4
2017E
$1,578
$237.2
2017E
$480
$72.1
2017E
$480
$72.2
2017E
$295
$44.3
2017E
$287
$43.2
Conclusion
DCF Valuation: Dividend Discount
Model
Cost of
Equity
EPS
Projection
Stable
Growth
Rate
Company Analysis (Millions)
Sector Earnings Summary
Mobile Service:
Pay TV:
Fixed Network Services:
Broadband:
Equipment Sales:
Total Company Earnings:
2013E
2014E
2015E
2016E
2017E
$196.9 $196.9 $208.9 $219.9 $229.3
$62.4
$65.2
$67.7
$70.1
$72.1
$58.3
$62.6
$66.4
$69.6
$72.2
$39.0
$40.4
$41.8
$43.1
$44.3
$32.7
$36.0
$38.9
$41.4
$43.2
$389.3 $401.0 $423.7 $444.0 $461.2
÷ 1,717 million outstanding shares
Earnings Per Share (EPS)
$0.23
$0.23
$0.25
$0.26
$0.27
2-Stage
Growth
Model
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
DCF Valuation: Dividend Discount
Model
Cost of
Equity
Historical
Average
Population
Growth Rate
EPS
Projection
=
2%
Stable
Growth
Rate
2-Stage
Growth
Model
*Source: World Bank
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
DCF Valuation: Dividend Discount
Model
Cost of
Equity
EPS
Projection
Assumptions Summary Table
Cost of Equity
Long Term Stable Growth (EPS):
Company Analysis
2013E
Earnings Per Share (EPS) $0.227
6.55%
2.00%
2014E
$0.233
2015E
$0.247
2016E
$0.259
2017E
$0.269
2018E
$0.275
Promised Dividend: $0.20
Stable
Growth
Rate
Discounted @ Cost of Equity = 6.55%
DCF Stock Price
= $0.20/ (0.0655-0.02)
2-Stage
Growth
Model
=$4.40
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Section:
rd
3 Pillar of
Success
Confirmatory Valuation:
B
S
C
Relative Valuation
Industry Average PEValuation
Comparable Companies
China Mobile
China Telecom
Digi.com
Maxis Bhd
Telekom
Axiata
Singtel
Starhub
M1
Advanced Info Service
Shin Corp
Total Access Comm.
Bharti Airtel
Average
Stock’s
Characteristics
Business
Segments
PE
11.3
20.5
29.2
23.8
25.2
19.9
14.6
19.9
17.9
17.8
17.7
18.5
27.2
19.6
DCF Valuation
Criteria for Selection
1.Nature of Business:
Telecommunications
2.Geographical Location:
Asia Pacific Regions
3.Industry Specifics:
Liberalization from previous
state-owned control
Relative Valuation
Risk
Conclusion
Industry Average PEValuation
Industry Average PE
19.60
Stock’s
Characteristics
x
Forward EPS
$0.23
Business
Segments
DCF Valuation
=
Relative Valuation
Fair Value:
$4.44
Risk
Conclusion
Section:
Risk
B
S
C
Understand the potential risks of the
company
House model to understand Starhub’s
valuation
Valuation of Starhub
Sustainable
Business
Segments
Defensive
Income stock
Confirmatory
valuations
Questionable Risk Profile
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Solvency Risk Ratios: A Comparison
(Using Group)
Comparables Average
Starhub
Interest Coverage Ratio
Interest Coverage Ratio
15.37
22.37
Debt to Equity Ratio
Debt to Equity Ratio
0.86
15.8
Net Debt to EBITDA
Net Debt to EBITDA
0.92
0.96
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Solvency Risk Ratios: A Comparison
(Using Group)
Comparables Average
Starhub
Interest Coverage Ratio
Interest Coverage Ratio
15.37
22.37
0.86
15.8
Net Debt to EBITDA
Net Debt to EBITDA
0.92
0.96
Starhub is highly geared;
Debt to Equity
Ratio more than peers
Debt to Equity Ratio
18X
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Solvency Risk Ratios: A Comparison
(Using Company’s Equity)
Comparables Average
Starhub
Interest Coverage Ratio
Interest Coverage Ratio
15.37
22.3
Debt to Equity Ratio
Debt to Equity Ratio
0.86
0.56
Net Debt to EBITDA
Net Debt to EBITDA
0.92
0.96
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Solvency Risk Ratios: A Comparison
(Using Company’s Equity)
Comparables Average
Starhub
Interest Coverage Ratio
Interest Coverage Ratio
15.37Starhub is in a better22.3
Solvency
Position
than
Debt to Equity Ratio
Debt to Equity Ratio
0.86its Comparable Peers0.56
Net Debt to EBITDA
Net Debt to EBITDA
0.92
0.96
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Section:
Conclusion
Must all good things come to an end?
B
S
C
Conclusion
Questionable Risk Profile but Stable
Dividends
Target Price: $4.40
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Thank
you!
Question and Answer
B
S
C
Pay TV
Broadband
1
-
-
Overall market
reach is nearing
saturation at
107%
Singtel likely to
gain most from
Nationwide
Broadband
Network
Stock’s
Characteristics
*Source: IDA, OIR
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Pay TV
Broadband
0.8
Unfavourable
x 0.8
Revenue:
Growth Rate
Applied:
2012
$249.4
2013E
$259
2014E
$269
2015E
$278
2016E
$287
2017E
$295
4.00%
3.70%
3.40%
3.10%
2.80%
2.50%
Adopt a linear decrease in high growth rate to stable growth rate (2.50%)
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Equipment Sales
Equipment
Sales
1
-
-
Equipment sales
poised for stable
growth given
consistent
introduction of
new devices
E.g.Samsung
Galaxy and
Iphone series
Stock’s
Characteristics
*Given its recent 2 years abnormal high growth, we expect
for it to maintain in the near term
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Equipment Sales
Equipment
Sales
1.0
Neutral
x 1.0
2012
$194.0
Revenue:
Growth Rate
Applied:
12.03%
2013E
$217
2014E
$239
2015E
$259
2016E
$275
2017E
$287
10.12%
8.22%
6.31%
4.41%
2.50%
Adopt a linear decrease in high growth rate to stable growth rate (2.50%)
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Pooling-of-interests Method Whereas the purchase method views a business combination as an
acquisition of one business by another, the pooling-of-interests method views it as a union of two previously
separate companies, achieved through the exchange of equity shares. Treating this transaction as a
“joining together’’ rather than a “purchase’’ avoids the question of acquisition cost. The pooling-ofinterests method combines the balance sheets of the two companies, with appropriate adjustments in the
equity section to account for the exchange of shares. Existing carrying amounts—”book values’’—of assets
and liabilities are simply added together.Since no cost figure is computed, no asset revaluations occur and
no goodwill isrecorded.
The pooling-of-interests method was used only when the combination involved an exchange of stock.
Bycombining the book values of the two companies, the market value of the exchanged stock was
ignored.Ownership and control of the combined company did not change, since the shareholders of the
acquired company received shares in the acquiring company. Leaving the acquired company at book value
was therefore justified by reasoning that no “acquisition” had occurred. Management often preferred
pooling: the absence of goodwill and its amortization led to higher future reported earnings than under the
purchase method. In addition, because the fair value of consideration paid was typically in excess of the
reported book values of net assets acquired, assets were lower under the pooling-of- interests method.
Consequently the return on assets ratio often used by investors to evaluate companies was higher under
the pooling-of-interests method.
Acquisitions recorded under the pooling-of-interests method reported net income in the acquisition year
that included the acquirer’s and acquiree’s income for the entire year, no matter when during the year the
acquisition occurred. Even when the pooling took place at the end of the accounting year, the combined
company’s income statement included the profits of both companies for all twelve months.This practice
Stock’s
Business
DCF Valuation
Relative
Risk
Conclusion
further increased
the value of theSegments
pooling-of-interests
method in the
eyesValuation
of management.
Characteristics
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion
Given the increasing concern over accounting for business combinations and the continuing
number of large transactions, the FASB proposed in 1999 to significantly change the accounting
for business combinations by requiring the purchase method for all business combinations,
effectively eliminating the pooling-of-interests method.To reduce the residual assigned to goodwill,
the FASB proposed that companies carefully analyze specific intangibles acquired, assign cost to
them, and amortize them over appropriate lives. Goodwill would be amortized over not more
than 20 years.
In the face of considerable opposition to its original proposal, the FASB crafted a compromise.
They retained elimination of the pooling method and identification of specific intangibles, but the
proposal that goodwill be amortized over a period not exceeding 20 years was dropped, and
replaced by a provision that goodwill not be amortized at all! In place of amortization, goodwill
must be assessed regularly to determine whether its value has been impaired.The FASB adopted
these modified provisions in 2001 when it issued SFAS 141, BusinessCombinations and SFAS 142,
Goodwill andOther IntangibleAssets. In 2008, the FASB issued SFAS 141R, making significant
changes in the business combination standards.
Stock’s
Characteristics
Business
Segments
DCF Valuation
Relative Valuation
Risk
Conclusion