9 things I learned from StarHub’s 2017 AGM

Last year, TPG Telecom was awarded the license to become the fourth mobile telco in Singapore. The Australian company is expected to commence operations in 2018. This event is causing a shake-up in the local telco industry as the marketplace is as crowded as it already is. Adding a new telco only increases the bargaining power of consumers over the telcos. We’re now seeing the telcos lowering their prices and beefing up their bundles in a bid to secure customers onto long-term plans.

This price war has not escaped StarHub and the company reported an 8.3% drop in net profit in its latest annual report. I’ve covered how the entry of the fourth telco will affect our local telcos M1, StarHub, and Singtel previously. This year, I decided to attend StarHub’s AGM to hear how the management plans to cope with the new competition and challenges in the local telco industry.

Here are 9 things I learned from StarHub’s 2017 AGM:

  1. Throughout the AGM, the management repeatedly mentioned its Enterprise Fixed segment. This segment provides services in fixed data connectivity, security and mobility solutions, data centres and data analytics. This seems to be StarHub’s next area of growth in its attempt to diversify and minimize the impact of the fourth telco. This segment as grown 3.7% annually over the past eight years.

  1. In 2009, chairman Steven Terrell Clontz hired CEO Tan Tong Hai to lead and grow StarHub’s Enterprise Fixed segment. Tan has a background as a system integrator and valuable experience from working at IBM. Tan explained that business dynamics have changed from “traditional” system integration to cloud-based services. Moving forward, StarHub’s priority is to increase business efficiencies by employing mobile data analytics. He feels that this new growth area will put the company on a better footing as StarHub’s competitors are still in the traditional system integration capability business.
  2. To compete in the Enterprise Fixed business, the CEO believes that StarHub’s expertise in fitting large buildings with optical fibre is key to proving its in-house capabilities to clients. For example, StarHub has fitted the entire buildings of Suntec City, Asia Square, and the airport with Wi-Fi connectivity – a service which the CEO thinks smaller operators can’t provide. Additionally, StarHub provides enterprise clients with data analytics on how users utilize the Wi-Fi service in their buildings. Moving forward, the company is targeting the B2B segment instead of the B2C segment for growth.
  3. A shareholder brought up his concerns about StarHub’s debt level. CFO Dennis Chia replied that StarHub’s net debt to EBITDA is 1.02 which is relatively low compared to regional peers who typically have ratios around 2. Wanting to verify this, I decided to do some research on the net debt to EBITDA ratios of the regional telcos. Of the ten closest competitors to StarHub, three of them have net debt to EBITDA ratios above 2. Two Indonesian telcos have ratios close to 2 and the rest generally have ratios below 1.5. StarHub actually has the second lowest net debt to EBITDA ratio after Malaysia’s Digi Berhad.

  1. Revenue from StarHub’s Pay TV division has been decreasing over the past few years from $396 million (2012) to $378 million (2016). I brought up the problem of TV set-top boxes which can access all of StarHub’s cable TV channels. The CEO admitted that the issue is causing a revenue leak for StarHub. The company has brought this matter up to the authorities and is currently working with them to address it. He said that the issue is not simple to address because the TV content is not stored in the boxes and it is difficult for the company to prove that the devices infringe on StarHub’s copyright. However, StarHub is engaging the content providers to act against the TV set-top box suppliers as it is their content that’s being pirated. The CEO explained that the agreement with their content partners is based on a shared-risk model and their partners will receive lower payments from StarHub if its subscriber base falls. Hence, he thinks the content providers should be keener to address this issue. After listening to the CEO’s explanation, I personally feel that the problem will not be easily solved and is a challenge StarHub will continue to face.
  2. StarHub has an 8.8% stake in MM2 Asia limited, a producer of films and TV content in Asia. MM2 Asia has a presence in Singapore, China, Hong Kong, and Taiwan. StarHub intends to work closely with MM2 Asia to inject more Asian content into StarHub’s Pay TV to ensure it remains relevant for local viewers. StarHub will also continue to stream international content but will be tight on negotiations to protect their margins.
  3. I recently cancelled my StarHub mobile plan and jumped over to Circles.Life. The reason for my move was due to Circles.Life’s attractive offer of 20GB of data for just $20. I asked the management why StarHub didn’t match Circle.Life’s offer, in which case I would have stayed and renewed my contract. The CEO replied that Circles.Life is a virtual telco that doesn’t own any infrastructure and leases its spectrum at a wholesale rate from M1. He thinks that in their effort to win customers, virtual telcos offer prices that may even go below their wholesale rate – which is unsustainable.
  4. A shareholder asked if StarHub was interested in acquiring its competitor, M1, after news reports revealed that three major shareholders were exploring a sale of their stakes. The chairman openly stated that StarHub had no plans to acquire M1 after considering a number of factors and the management feel the decision is in the best interests of the company.
  5. StarHub manages its free cash flow based on a three-year view. Even though profit is important, the payment of dividends depends on free cash flow. After full-year results are out, the management will project the company’s cash flow needs and whether it can sustain its dividend over the next three years based on the circumstances and the market conditions at that point in time. If conditions change, the management will make adjustments to their three-year view as they go along. As I walked away from the meeting, I left with the feeling that StarHub will face challenging times when the fourth telco makes its entry next year.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Victor Chng is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Victor is also the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple’s iBooks. On a personal note, Victor represented Singapore in the 2008 TAFISA World Games in Busan, South Korea and was the 2008 IFMA World Muay Thai Championships bronze medalist, kicking some serious ass along the way.

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