Oxford Brookes University Bsc (Hons) in Applied

Oxford Brookes University BSc (Hons) in Applied

Accounting Research and Analysis Project

An Analysis of the Business and Financial Performance of StarHub Group from 2008 to 2010

Topic chosen and for the reason

For the basis of my Oxford Brookes University degree research and analysis project (RAP) is project, the topic selected was number 8, "The business and financial performance of organisation over the three years period." This selection is due in large part to my ultimate dream job of being a professional financial analyst and the environment in which the Singaporean telecommunications industry is developing. For instance, Chong and Chow emphasize that, "Asia's telecommunications market has long been viewed as lucrative and fast growing. The value of the Asian market is estimated at $180 billion, while a recent study shows that the "Asia-Pacific excluding Japan has been the fastest growing information and communications technology market, moving at a compound rate of over 14.5%. Given this rapid growth and potential, foreign investors (particularly major global communications operators) have shown strong interest in investing in the region's telecommunications infrastructure" (p. 1). In this regard, I am very interested in analyzing all sorts of data triggered me to look into the entire picture of company, and best way to analysis the business and financial performance of the company. Moreover, this topic links to ACCA syllabus very well. I can use my knowledge from paper F5 Performance Management and F9 Financial Management to establish the basic principles of performance measurement, paper F7 Financial Reporting to interpret the financial statements by calculating ratios, such as Profitability, Liquidity, Gearing, Investor and Efficiency Ratios.

1.2

Background of the company

1.2.1

The research company chosen. The organisation I have chosen is StarHub Ltd. My RAP is based on StarHub Group's performance for three financial years (i.e., 2008 to 2010). This company and its recent financial performance represent a highly appropriate topic for the RAP for several reasons. First, in today's dynamic telecommunications industry, telecom service providers (TSPs) face constant challenges. Think of telecommunications as the world's biggest machine. Strung together by complex networks, telephones, mobile phones and internet-linked PCs, the global system touches nearly all of us. It allows us to speak, share thoughts and do business with nearly anyone, regardless of where in the world they might be. Telecom operating Companies make all this happen. Second, while striving to speed next-generation products to market and meet consumer demand, companies of all types and sizes must also support existing services and deal with issues of convergence and consolidation. Both TSPs and independent software vendors continuously seek alternative operational models that will keep expenditures low and revenues strong.

To date, there have been substantial changes in telecommunication in Singapore. The telecommunication is no longer government monopoly, so there is very strong competition amount telecommunication industry and technical development also brought increase types of services that are offered, including telephone, mobile, pay -TV service, broadband, network, video conference and many more. At present, the Singapore telecom industry is fairly complex because of its unique characteristics compared to other similarly situated enterprises. There are three companies currently providing telecommunication services in Singapore as follows.

1. Singapore telecommunication Ltd.

2. StarHub Ltd.

3. M1 Ltd.

In this research project, the company, StarHub Ltd., was selected for the target research company.

1.2.2

The background of the company. In 1999, the regulator of telecommunications in Singapore, the Telecommunications Authority of Singapore, issued StarHub (hereinafter alternatively "the company" or "the Group"), a consortium of British Telecom, NTT, and local Singapore partners, a license to provide cellular services, including voice telephony, international direct dialing, leased circuits, public switched message and data services and other data services (Rao & Klopfenstein 2002). These trends are reflective of the fact that In Singapore, ownership of facilities-based services by foreign interests is restricted to a less than majority ownership (i.e., 49%) and even though monopolies over fixed-line services remain in place, Singapore has permitted at least some degree of competition for data and leased lines and full competition for mobile cellular, paging, and cable televisions services (Chong & Chow 1999).

The company's main competitor, Singapore Telecom (SingTel), is the monopoly provider of basic local and international telephone services, but as noted above, StarHub received its license in 1999 and began operations a year later (Chong & Chow 1999). Since that time, StarHub has completed an interconnection agreement with SingTel (i.e., the Interconnect Agreement Signed by SingTel and StarHub) to provide the basis for a more competitive telephony service in Singapore today (Chong & Chow 1999). These actions were even more significant from a regional perspective because Singapore was among the first Asian countries to seriously address the issues of competitive regulation involving interconnection oversight and the simultaneous competition of numerous actors (Chong & Chow 1999). Consequently, the telecom investment climate in Singapore is widely regarded as a stable environment for investment (Chong & Chow 1999, p. 1).

Today, StarHub is Singapore's fully-integrated info-communication company, offering a full range of information, communications and entertainment services for both consumer and corporate markets. StarHub operates Singapore's fastest two-way HSPA+ mobile network that delivers up to 21 Mbps for downlink to complement its nation-wide GSM network, and an island-wide HFC network that delivers multi-channel cable TV services (including High Definition Television and on-demand services) as well as ultra-high speed residential broadband services. StarHub also operates an extensive fixed business network that provides a wide range of data, voice and wholesale services. Over Singapore's fibre-based Next Generation Nationwide Broadband Network, StarHub offers a broad range of home and business broadband plans along with a host of advanced media-rich value-added services.

Launched in 2000, StarHub has become one of Singapore's most innovative info-communications providers, and the pioneer in 'hubbing' - the ability to deliver unique integrated and converged services to all its customers. StarHub, listed on the main board of the Singapore Exchange since October 2004, is a component stock of the Straits Times Index and the MSCI Singapore Free Index. Since its inception just 11 years ago, StarHub has become one of Singapore's most innovative info-communications providers, and the pioneer in 'hubbing' - the ability to deliver unique integrated and converged services to all its customers (Annual report, 2010).

1.3

The aims and objectives of the report

1.3.1

The aims of the report. The aim of this project was to appraise the business and financial performance of StarHub Ltd. For the years 2008 to 2010. In this research and analysis report, only the Group company of Starthub will be analysed and discussed. Therefore, Group information includes the company's subsidiaries as well.

1.3.2

The objective of the report. The research questions analysis and discussed in research project are:

1. What was StarHub overall financial performance from 2008 to 2010 and how did fare against competitor?

2. What is current strategic position of StarHub?

3. What are the critical success factors for StarHub achieving growth?

4. Forecast of operational & financial performances for 2011

According to ACCA textbooks, there are many different ways to measure financial performance. Based on the foregoing objectives, it was determined that the use of the ratios and the trends of ratios primary tools in the analysis were most appropriate. To this end, financial ratios were calculated from one or more pieces of information from a company's financial statements. In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can provide a financial analyst with a robust picture of a company's situation and the trends that are emerging.

The classification of ratios into different categories depends on objectives of financial analysis, which group ratios into four broad categories: (a) profitability, (b) liquidity and efficiency, (c) finance and (d) investment ratios. A ratio gains utility by comparison to other data and standards. By calculating the major ratios for all the four categories, the financial statements could be analysed and interpreted through these ratio results.

In terms of business analysis, the study examined the competitive positioning and short- to medium-term business strategies of key industry players. Corporate strategy was examined within the context of telecommunication industry forecasts, in macroeconomic views and analysis the wider competitive landscape to generate company Porter's five force (The threat of new entrant, The bargaining power of suppliers, The bargaining power of buyers, The threat of substitutes and The competitive rivalry that exists amongst existing organisations in the industry) analysis.

Comparable financial information is useful as a management tool for organizations of all types, regardless of their ownership, because comparable information allows organizations to discover operational areas in need of improvement. In this research, ratio analysis was completed for Singapore telecommunication Ltd. And M1 Ltd. As competitor and compared with the performance delivered by StarHub Ltd.

In summary, the objective of this project is to measure business and financial performance of StarHub for the years 2008 to 2010. It also provide more useful information by means of analysing the Profitability, Liquidity and Efficiency, Gearing and Investment ratios and comparing them with different periods and with the competitor also Porter's Five Force analysis for macro environment in this industry.

2.

INFORMATION-GATHERING AND ACCOUNTING AND Business TECHNIQUES

2.1

Information gathering

2.1.1

Sources Used and Reasons for their use. Information gathering is the essential step before starting off analysis. According to ACCA project guideline, theoretically, it would be better to combine the two different types of data together-Primary data and Secondary data. Primary data is data that is collected specifically by or for the user at source, whereas secondary data is data neither collected directly by the user nor specifically for the user. In this report, the secondary data was used entirely, including annual reports for all the related years, theories and articles on financial analysis and ratios, financial statement, CEO's message.

2.1.2

Method used to gather information. During the conducting this project, information was collected from following sources set forth in Table 1 below:

Table 1

Information Sources

Source

Description

ACCA textbook

ACCA textbook is the main source of my knowledge, hence it is helps me in determining topic conducting research.

ACCA Student Accountant

ACCA Student Accountant is important source of Information. The article "How to pass rap" provide guide on how to prepare my project and to prevent any pitfall.

'How to approach performance appraisal questions' ACCA Student Accountant

The classification for financial ratios comes from the work of Steve Scott (2004). It provides a basic foundation for my analysis report.

Internet

The Internet is a powerful engine for finding information. Most listed companies set up their homepage, in which it provides information to its shareholders and prospective investor. StarHub is public listed company, and can easily obtain annual report or other relevant information via (Http://www.StarHub.com), (Http://www.M1.com), (Http://info.singtel.com). Http://www.Search.com.sg provides a range of information to its users or consumers. This search engine is free to the general public who want details of companies that are registered in Singapore.

Libraries

I am blessed with a well-equipped library in Singapore. It is very convenient to borrow books. Moreover, I am able to find various kinds of books in the libraries to help me gain more knowledge. Such as, "References On Accounting Analysis."

Newspapers

Newspapers are also an easy way to obtain information. I can obtain information relevant to Topic of research on StarHub in newspapers like Strait Times, Business Time, Today.

2.1.3

The limitation of information gathering. Secondary data is the data that have been already collected by and readily available from other sources. Such data are cheaper and more quickly obtainable than the primary data and also may be available when primary data cannot be obtained at all. However, the accuracy of secondary data is not known hence will affect research outcome. In this regard, Dennis and Harris (2002) report that, "Secondary data are information that has been collected earlier for a different purpose, but which may still be useful to the research project under consideration. Census data are a good example of secondary data, and of course the Internet can be searched by key words entered in search engines to obtain secondary data on a huge range of subjects" (p. 39). Locating the precise types of information that are desired in order to answer a specific research question using secondary data is more cost effective and efficient, but there are limits with respect to the precision of the information available (Dennis & Harris 2002). Finally, there were also some difficulties in across-the-board comparisons with the company's competitors because of differences in accounting periods (e.g., StarHub's closing date is 31 December while Singtel's closing date is 31 March. Consequently, these differences affected the accuracy of the business analysis that resulted.

2.1.4

An ethical Issue on gathering information. Accountancy is one of the most respected professions in the world and adhering to a code of ethics is fundamental to the act of being an accountant. As such, ethics and accountancy became two indivisible aspects. ACCA works hard with its members to ensure the highest standards of practice and ethical conduct are adopted.

For this research project topic as explained in the information gathering section 2.1.2, most of the information will be sourced using secondary data sources. And management have sometimes indulged in creative accounting techniques in order that the ratios calculated from published financial statements will show a more favourable picture than the true underlying position. In view of above, I have to be careful in extracting information to ensure that I do not copy the work for the original author in line the value of integrity. I should always provide referencing accordingly whenever I cite any work done by others. This is to avoid plagiarism.

2.2

Accounting and Business techniques

2.2.1

Accounting Ratio. The classification of ratios into different categories depends on objectives of financial analysis, which categorize ratios into four broad: Profitability, Liquidity and Efficiency, Finance and investment ratios. A ratio gains utility by comparison to other data and standards. By calculating the major ratios for all the four categories, the financial statements could be analysed and interpreted through these ratio results. Financial ratio analysis groups the ratios into categories, which tell us about different facets of a company's finances and operations. An overview of some of the categories of ratios is given below.

Financial ratio analysis groups the ratios into categories, which tell us about different facets of a company's finances and operations. An overview of some of the categories of ratios is given below in Table 2.

Table 2

Overview of Typical Financial Ratio Categories

Ratio Type

Description

Profitability Ratios

This ratio measures the firm's ability to create value in the market and the ability to earn fair returns for shareholders. It is also a measure of the productivity for the firm's capital resources. For examples, Return on Capital Employed (ROCE), Return on Equity (ROE) and Profit Margin.

Liquidity and Efficiency Ratios

This ratio measures the firm's ability to settle short-term debts and liabilities, for examples, Current Ratio and Efficiency measures the effectiveness of the management in controlling the main elements of working capital -- stock, debtors and creditors, including Inventory Turnover, Accounts Receivable Collection Period and Accounts Payable Payment Period.

Gearing Ratios

This ratio measures the relationship between the long-term debt and the equity used to finance a company and hence a measure of the associated financial risk of debt to the shareholders. The greater the debt component in the capital structure, the greater is the risk to company. This includes Debt-Equity ratio and times interests earned ratio. Total debt often includes both Long-term and short-term interest bearing debt.

Investment Ratios

Finally, this ratio measures the company's standing and estimations of current and future firm value, based on information that continually becomes available to market participants. Examples include Earnings per Share (EPS). Price-Earnings Ratios (P/E)

The formulas for above-mentioned ratios in Table 2 are given in Appendix F - Graphics.

2.2.3

Limitation of Ratio. Although ratio analysis is very important tool to judge the company's performance, following are the limitation of it.

1. Company's industry category is often difficult to identify because diversification

2. Published industrial average are difficult to obtain

3. Accounting precises differ across companies

4. Sometimes difficult to interpret deviation/variation in ratio

5. Industry ratio may not be described target.

2.2.4

Business Techniques. Operational performance will be dependent on the successful management of the opportunities, challenges and risks presented by changes in the external environment. No organization exist in a vacuum, therefore it will be affected and will have an effect on its environment. By identifying and understanding the changes within the environment, StarHub will be able to adjust its operations to ensure long-term company profitability and survival.

2.2.5

Porter's Five Forces. The study used Michael porter's five forces framework to analysis operational performance. This framework is designed to analyze "the structure of an industry and its competitors" (Porter 2004, p. 37). There are five inter-connecting forces in the framework; potential entrants (the threat of entry), the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes and the competitive rivalry that exists amongst existing organisations in the industry. Each of these is no considered in turn in the context of StarHub, focusing on those factors that have a significant effect on their industry. Porter's five forces model for competitive analysis is very useful but it is missing key elements such as industry group, industry sector analysis or competitive forces.

2.2.6

Weakness of Industry Sector Analysis. According to Porter, the five forces model is intended for an industry level analysis and it is not intended to be used for an analysis of an industry sector. The suggestion is to decompose the industry sector into component industries and then apply the five forces model. Whilst this approach will offer competitive insights it may miss the emergent properties of the sector i.e. The whole may be greater than the sum of the parts (Lever 2008). In summary, the Porter Five Forces Model has some limitations but it is still a powerful frame work that can provide a useful set of insights from its competitive analysis and used in conjunction with other tools such as SWOT can help to define an effective competitive strategy (Lever 2008).

2.2.7

SWOT analysis. According to Cravens, the overarching objective of a SWOT analysis is to identify key issues that will allow an informed strategic approach. In this regard, the SWOT analysis attempts to identify the strengths, weaknesses, opportunities, and threats related to the environment; strengths are comprised of positive aspects that are internal to the entity; weaknesses are those negative aspects that are internal to the entity; and opportunities are positive aspects that are external to the entity; finally, threats to the organization are regarded as being negative aspects that are external to the entity. In order to overcome above weakness, this study used a SWOT analysis to identify the key internal and external factors that are important to achieving the objective. These factors were derived from within the company's unique value chain; as noted above, SWOT analyses groups key pieces of information into two main categories: (a) internal factors and (b) external factors. It should be noted, though, that a SWOT analysis is not free from its limitations. It may cause organisation to view circumstances as very simple because of which the organization might overlook certain key strategic contact which may occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very subjective as there is great degree of uncertainty in market.

3.

ANALYSIS, CONCLUSION AND RECOMMENDATIONS

3.1.1 Profitability. The company's earning and profitability for the years 2008 through 2010 are presented in Table __ below.

Table

StarHub Profitability: 2008-2010

Year

Description

2008

The Group's full year revenue grew 2.013 million from 2007 to $2,127.6 million, driven by revenue increases in all its lines of business. Despite a 5.7% increase in operating revenue, pro-t from operations was 2% lower at $409.3 million total operating expenses were higher at 7.6%., ROE dropped 6% from308% in 2007 to 288% in 2008. During the year, the competitive intensity in the mobile and broadband markets and higher content costs in the Pay TV segment drove direct cost of sales higher by $86.5 million or 12.4% year-on-year while other operating expenses grew 3.9% or $34.9 million year-on-year.

This analysis shows that the company positioning extremely high figure of ROCE compare to competitor despite profitability lower than the other two competitors. ROCE chart implies that company maintains very low position in capital employed it also linked to gearing ratio which is reflected company's financial structure.

2009

For another consecutive year, StarHub maintained growth and but was still significantly affected by the economic crisis. Net profit margin chart shows that company operating with high cost-based with slim in NPM compare to its competitor. For 2009, the company's staff costs were 5% lower year-on-year at $216.3 million due mainly to lower provision made for variable bonuses for the Group this year and reversal of accruals made for senior management performance-based bonus no longer required. As a percentage of operating revenue, staff costs for the year trended lower at 10.2% of operating revenue compared to 11.3% in 2008.

Against previous year, other expenses were up $24.4 million to amount to $91.3 million this year. The increase was attributed to a few expenses accounts: Foreign exchange differences this year, which was a loss of $2 million, due to the rapid strengthening of the USD as compared to a gain of $2.3 million last year; higher professional services incurred for outsourced customer service support and bill collections, totaling $7.5 million; higher occupancy and utilities charges of $3.5 million and provision for restoration costs for leased premises of $3.6 million this year. As a percentage of operating revenue, other expenses for the year trended at 4.3% compared to 3.3% last year. The group's total asset stood at 1732 million, rose 4% from the previous year. The increase due to mainly profit increased and cost measure action taken by management. It also contributed to increase in net asset, resulting in a decrease of ROCE from 288% to 209%. ROCE ratio also dropped significantly, but still maintained a very high position compared to the Group's two competitors. This analysis shows that company's still maintain small amount of shareholder's equity compared to its competitors.

2010

The group maintained continue growth and achieved by rose 4%, however operating cost increased 9% compared to 2009. The overall financial picture is of a company that failed to control cost as it sought increase in revenue, costs were not control at the same rate as revenue increased. The net shareholder's equity dropped dramatically 56% compared to previous year mainly due to goodwill written off S$276.3 Million which represents the excess of consideration paid on the acquisition of subsidiaries prior to 1 January 2001 over the Group's share of the fare value of net assets acquired. Its lead the return of capital employee was jump up from 209% to 592%.

Compared to competitor M1 and Singtel, StarHub's shareholder's net equity was very low in 2010. Over the 3-year period, M1 maintained 58%, Singtel maintained 17% in average. In summary, mobile communications is the largest revenue stream in this industry, Singtel delivered double-digit growth of 11 per cent to S$1.79 billon which was driven by strong postpaid customer acquisitions and higher postpaid average revenue per user (ARPU) on the back of higher smartphone acquisitions. Total mobile customer base grew 6.1% to 3.31million as at 31 March 2011, representing a leading market share of 44.8 per cent.

Source: Annual Report 2010

The group's revenues and expenses growth, net profit margin, gross profit margin and return on capital employed for the period 2008 through 2010, inclusive, are depicted in Figures 1 through 4 below.

Figures 1, 2, 3 and 4. StarHub's revenues and expenses growth, net profit margin, gross profit margin and return on capital employed for the period 2008 through 2010

Source: Appendix E-Graphic 1. Profitability

3.1.2

Current Ratios. The company's current ratio for the period 2008 through 2010, inclusive, is set forth in Table __ below.

Table

StarHub Current Ratios

Year

Description

2008

Current ratio of 2008 dropped 3% from 0.53 to 0.51. This indicates that StarHub does not have enough short-term assets to cover its short-term debt. This number which is below 1 indicates a negative working capital.

2009

For the year 2009, Current ratio was increased compare to previous year but still low, it shows StarHub Group's liquid assets unable to cover liabilities, working capital management is still ineffective. Hence management should monitor for the improvement in this economic downturn period.

2010

For the year 2010, Current ratio was dropped 8.7% from 0.52 in 2010 and more worse compare to previous year. It indicates the Group's asset is more than its liability and would not be in a difficult position to meet its short-term liabilities.

3.1.3

Efficiency Ratios. The company's efficiency ratio for the period 2008 through 2010, inclusive, is set forth in Table __ below.

Table

StarHub Efficiency Ratios

Year

Description

2008-2009

Calculation debtor's day -- 21 days which is indicates the effectiveness of a debt collection routine. It sets out the relationship between debtors and the sales that have been made on credit, also show quickly customers are paying their invoice.

Meanwhile calculation Creditor's day - 72 days which implied that control over payment of suppliers is in StarHub's hand. From this ratio show that Lengthening creditor days which indicates the company is heading for financial problems as it failing to pay creditors, on other hand, StarHub is simply getting better at getting good credit terms out of its suppliers for improving its working capital management. Looking at other measurement of financial health such Gearing, interest cover and cash flow later on.

2010

The current ratio changes were affected by the adjustment of its working capital management policy. The debtor's days was increased from 21 days to 28 days in 2010, Creditor's days also increased from 79 days to 84 days in 2010 but compare to industry, its shorter than compare to competitor Singtel. Debtor's also shorter than Singtel and M1. This reflects StarHub effectively managed working capital. In summary, compared to competitor M1 and Sintel StarHub weak position in current ratio, whereas M1, payout Short-term loan improved extremely good position in 2010.

Figures 5 and 6: StarHub Current and Efficiency Ratios: 2008-2010

Source: Appendix E-Graphic 2. -- Liquidity and Efficiency

3.1.3

Gearing ratios. The company's gearing ratio for the period 2008 through 2010, inclusive, is set forth in Table __ below.

Table

StarHub Gearing Ratios

Year

Description

2008

The shareholder fund of group 311 million decrease 5% from previous year. The long-term debt increased from 719 million to 807 million. It leaded to debt -- equity ratio decrease 7.88 to 6.44 which is very high risky level. This indicates StarHub is financed mainly by debt instead of shareholders.

2009

Compared to 2008, the Group's long-term debt reduced by $90 million to $605 million as at 31 December 2009 because company management approach swiftly for the debt as the company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.

2010

Foe the year of 2010, The gearing ratio was significantly jump up 83% from previous year and reached to an astounding figure of 8.8. From recovering from economic downturn, Starthub used banking facility for finding for business expansion.

The Group's interest cover ratio for the year of 2008 was maintained from 2007 at 15.88 to 15.12 in 2008. Even though the Group experienced a lower position vs. its competitor Singtel, the ratio was still quite high hence the risk of bankruptcy is low.

For the year of 2009, interest cover ratio maintained at similar level of previous year 15.12 times that safety margin that the business has in terms of being able to meet its interest obligations, low risk in bankruptcy.

With respect to the Group's cash and bank balance, for the year of 2010, from its annual report, StarHub reports that it maintained a high portion of cash, an indication that even in the aftermath of the lingering global financial recession, the Group experienced no problems with loan interest at this current point of time. From the cash flow statements shows that, StarHub is refinancing significant portions of their debt as the maturity date loans and maintains health and sustainable free cash flow. In other words, the group will be able to extend their loan maturity dates as long as they remain creditworthy.

Although StarHub's debt levels are significant, these levels are not expected to present an inordinate challenge for interest payments. Close monitoring of their financial performance in their years to come is in order however. Since management has delivered solid returns up till this point of time, it is reasonable to suggest that this trend will continue into the foreseeable future.

In terms of the Group's financial structure, StarHub is in the weakening position. In fact, Singtel has maintained very low gearing ratio 0.26 average over three years, M1 has maintained 0.67 on average over three years, both are very stable in gearing, maintains high portion of equity provides a cushion in economic period added into financial strength as shown in Figures __ and __ below.

Figures __ and __. StarHub's Long-Term Debt to Equity vs. M1 and Singtel and Cash & Bank Balance: 2008-2010

Source: Appendix E-Graphic 3. Gearing Ratio

3.1.4

Investment ratio.

3.1.4.1

Earnings per share. The Group's basic earning per share decreased from 18.72 to 18.62 cents due to decrease in profit attributable to shareholder. For the year of 2009, despite worsening economic condition, the Group managed to achieve basic earning per share to 18.68 cents. For the year of 2010, the closing share price on December 2011 was S$2.63, representing a significant 22% increase versus 2009. This large figure has mirrored the continued revenue growth; however, basic earning per share dropped from 18.68 cents to 15.34 cents as a result of a decline in profit attributed to shareholders. Despite the decrease on EPS, the dividend per share was increased 5% to 20 cents.

3.1.4.2

P/E Ratio. For the year of 2008, the Group's P/E ratio dropped to 106.1 from 14.79 because of the closing (31 December 2008) share price, representing an enormous decrease of 1.94 from 2.81 in the previous year which was lowest price for the year its was affected by the 2009 economic crisis. Despite facing difficulties, dividend was increased from previous year 16 cent to 18 cents in 2008.

For the year of 2009, Despite worsening economic condition, Group Ratio was maintained strongly at 11.51 which was contributed by the higher closing market price of S$2.15 compared with $1.94 of previous year. It also showed that the public had gradually recovered their confidence to StarHub. Dividend increase also 1 cent previous years of 18 cents.

From gearing analysis and cash flow statement, investors should look out for reconsidering their investment in StarHub when

1. Significant drops in free cash flow over a sustained period

2. StarHub being forced to raise additional amounts of money and refusing cut it dividend yield

3. StarHub taking on even more debt despite a significant rise in interest rates

The Group's earnings per share, price earning ratio and investor cover ratio for the period 2008 through 2010, inclusive, are illustrated in Figures __, ____ and __ below.

Figures __, ____ and __. Group's earnings per share, price earning ratio and investor cover ratio for the period 2008 through 2010

Sources: Appendix E-Graphic 4. Investment Ratio

3.2

Porter's Five Force Analysis.

Michael Porter provides, through his five forces frame work, a useful way of analyzing the competitive environment of StarHub. Analysis suggests that the following key factors are shaping this environment.

3.2.1

Threat of New Entrants. New entrants into an industry bring new capacity and resources with which they aim to gain market share. Their entry may lead to price reductions, increased costs and reduced profitability for organisations already in the market. Potential entrants may be deterred by high barriers to entry and by the threat of aggressive retaliation from existing competitors in the industry.

StarHub is operating in an industry where the costs of entry are significant because it is capital and knowledge intensive. Economic of scale give StarHub a competitive advantage in the market place, this lead to lower price and higher profit. The products are complex and there is likely to be significant learning curve with costs only falling as volume builds up over the time. It create barrier to new entrants.

The need for government approval of obtaining a new operating network license is under restriction, thus it also creates a significant barrier to new entrants. New entrants also discouraged by the uncertainty and surrounding the industry, in terms of technology, user acceptance and the R&D investment necessary to create components and systems. Further more, the need to offer comprehensive after sale support, although a problem of StarHub, does also create a significant barrier to new entrants.

Finally, the exit costs and barriers to exist in the shape of industry-specific knowledge, skill and assets reduce the attractiveness of the marketplace to new entrants.

3.2.2

Bargaining power of suppliers. Suppliers exert bargaining power over participant in an industry by raising prices or reducing the quality of their good and services. Suppliers tend to be powerful when the industry is dominated by a few companies. This is the case with info-communication service supply industry where dominated by three in Singapore. The potential role of suppliers restricting supply channels has already been recognized as a barrier to entry.

From ratio analysis shows that creditor's payment period is very short it only average 78 days over the three years. It implies that StarHub is able to exert much influence on it supplier.

StarHub is purchasing semiconductors and microprocessor from major global companies whom probably have well-known and powerful brands. As StarHub is being a reputable big company, it will have a power to exert buyer pressure on its suppliers.

3.2.3

Bargaining power of buyers. Buyers attempt obtain lower prices or seek to get increased or better quality service or products. They do this by playing competitors off against each other. Under certain conditions a buyer group can have considerable influence. Many of these conditions only arise when the buyer itself is an organisation, not individual consumers. StarHub is competing in five discrete marketplaces: (a) mobile service, (b) pay television service, (c) fixed network, (d) broadband and (e) sales equipment.

The above services are supply to large end users who are likely demand a testing combination of low price, high quality and reliability and unlikely to tolerate the poor service. The alternative sources of supply is available in the market, and that switching costs are relatively low, the only real lock-in is the term of contract, currently twenty four months long, after which buyers can switch to a competitors without penalty. This combination of circumstances suggests that above customers have significant bargaining power in the market place. It is reflected from ratio analysis, the debtor's collection period is very long it only average 23 days over the three years. It implies that StarHub is able to exert much influence on its buyers.

3.2.4

Threat of substitutes. High technology industries are but their very nature, prone to new technologies emerging that threaten and then eventually replace the established technology. Hence it is very important that companies in such industries constantly scan the external environment to identify and anticipate such threats. There is evidence that large, successful, high technology companies are particularly vulnerable to ignoring the challenge from disruptive new technologies and new technology is prompting a raft of substitute services.

Products and services from non-traditional telecom industries pose serious substitution threats. Cable TV and satellite operators now compete for buyers. The cable service provider, with their own direct lines into homes, offer broadband internet services, and satellite links can substitute for high-speed business networking needs. Railways and energy utility companies are laying miles of high-capacity telecom network alongside their own track and pipeline assets. The telecom operators is the internet, it is becoming a viable vehicle for cut-rate voice calls. Delivered by Internet Service Providers (ISP) is not only a telecom operators - "internet telephony" could take a big bite out of telecom companies' core voice revenues. However, StarHub is being a sole operation delivering a full range of information, communication and entertainment service over fixed, cable, mobile and internet platforms, have competitive advantages in its ability to respond quickly and flexibility to such change.

3.2.5

Competitive rivalry in the industry. Rivalry normally always takes place within an industry. Rivals jockey for position by reducing prices, launching advertising campaigns and improving customer service or product warranty. In the context of the Inco -- communication and network industry, the intensity of the rivalry is fuelled by the forces set forth in Table __ below:

Table

Intensity of Rivalry Forces for StarHub

Force

Description

Equally balanced competitors.

StarHub poses in resources relatively low compare to Singtel. (e.g., in term of financial position which is far below that of Singtel). For StarHub, this creates instability in the market because the companies are 'prone to fight each other and have the resources for sustained and vigorous retaliation' (Porter, 2004).

Lack of differentiation of switching costs

Mobile phones and pay TV services and other services are largely perceived by customers and commodities. In such circumstances, the buyer's choice is based on price and service, and this resulting in intense pressure for price and service competition.

Price war

New technology is prompting a raft of substitute services. Nearly everybody already pays for phone services, so all competitors now must lure customers with lower prices and more exciting services. This tends to drive telecom industry profitability down. In addition to low profits, the telecom industry suffers from high exit barriers, mainly due to its specialized equipment. Networks and billing systems cannot really be used for much else, and their swift obsolescence makes liquidation pretty difficult.