I took up a pretty substantial short position for Starhub today at a price of $1.35.

Starhub Limited is no stranger to most Singaporeans, as we probably use their services one way or another.

At the peak of their share price, Starhub was trading at $4.13 back in 2014, but have since seen declining numbers to end the day where they are today at $1.34 due to massive competitions, evolving technology and erosion of quality services that it can offer to customers.

Mobile Service Revenue fell 10% year on year due to the entry of competitions from the MVNOs across all segments of data usage, voice and IDD services. However, there are brighter scenes in the post-paid customer base numbers as they managed to grow this segment by 7% year on year. Prepaid numbers are down by 11% as customers tend to switch from one to post-paid.

Pay TV numbers continued to struggle as they lost 20,000 subscribers in 2019 while the ARPU dropped 17% year on year.

On the enterprise business, cyber-security managed to outperform by growing by 92% for the first half, but this contributes barely 7% of the Group's overall revenue figures. Furthermore, they have agreed to also sell their cryptographic stake to Temasek, which now means going forward they will only own 60% stake through Ensign. 

In the earlier days of 2019, the Group made a decision to revise their dividend payout policy from a fixed 16 cents to a variable policy of paying out at least 80% of their net attributable profits for FY2019.

The Group committed nevertheless for a 9 cents dividend for FY2019, which translated to about $155m based on their total outstanding shares.

If we look closely at the numbers, that's not looking great.

While net profits attributable to shareholder for 1H FY19 numbers amounted to $93.5m, free cash flow numbers fell to $75.9m for the first half of the year. If we annualized the cashflow, that's $150m, which is barely the numbers needed to sustain their 9 cents dividends, give or take.

For them to maintain this kind of payout at 9 cents, their business earnings would have to sustain at the current level and capex has to be minimal like they did in the first half. Already, the management has guided for capex for 2019 (excluding spectrum) to be in the range of 11% to 12% of their total revenue in 2019. Working backwards, this means 11% x annualized $2,300m = $253m capex for FY2019. They already spent $116m capex in 1H, so I'm expecting 2H capex to be at around $137m.

Don't forget we have not included the 4G spectrum capex which they have to incur an additional $282m which they have committed. 

What do you get when a company has a declining business division, erosion of margins due to competitions, depleting cash balance (cash and cash equivalent at $97.5m, net debt position of $930.2m, total outstanding capex commitments at $443.8m, including the commitments for 4G spectrum rights of $282m that have yet to be incurred)?

The probable likelihood scenarios are either more borrowings (keep tapping on those while it lasts), equity rights call, or further dividend cuts, or all of the three combined together at the worst scenarios.

In order to "grow" their business and maintain its competitiveness, they will need to spend on capex, like they did with their pay tv business when they introduced brand new TV passes in order to cater to customer's preference of moving to fibre tv content.

Where the world is already moving into the possibility of a 5G network, Starhub is still lingering around 4G. I wonder whats the capex going to be like for 5G should Starhub eventually go into this route. 

It's incredibly difficult to call for the bottom when you have companies that are still in the midst of the decline and are shifting model to cater the needs of the new world. It doesn't help also to know that the company's balance sheet have already deteriorated when the fight is not yet over (Knock, knock TPG, when will you arrive?).

While it's a long way from here before it goes to $1, a couple of bad results followed by a further cut in dividends might be the last straw for investors to run. 

On the dividends front, an eventual cut to 7 cents/share dividends, which translates to 7% yield for investors at $1, would be more sustainable moving forward. 

The 7 cents/shares would require the company to fork out $121m, which if based on 80% payout, would require the company to earn a profit of $151m.

It would mean a further drop of around 19.2% from where they are today or a terminal growth of negative 3.5% over the next 5 years but it will not be a surprise if it comes to that stage in the next one or two years.

Combine this with where we are on the global trade war and we might just see a perfect storm brewing for this company.

Thanks for reading.