StarHub – DBS

Delivers on promise

Comment on Results
Starhub reported a net profit of S$80.8m, up 7% y-o-y and 15.4% q-o-q. Excluding the impact of higher tax rate, the results are broadly in line with our estimate of S$83m. Starhub has proposed a 4 cents interim dividend and raised its full year dividend guidance to a minimum of 15.5 cents from 14 cents earlier.

Broadband segment was the top performer in revenues. Revenue grew 10.8% y-o-y with broadband revenue registering the fastest growth of 15.6%. Overall service EBITDA margin of 35.3% is better than 34.4% last year. While there was an improvement in EBITDA margins in all the three segments, margins for mobile business improved significantly by 3 ppt to 43.2% because of (1) focus on higher margin, pre-paid service that lowered overall customer acquisition costs (2) efforts on retention of high-value post-paid customers with higher minutes of usage (MoU), even at the cost of market share.

Outlook
In our view, StarHub is well on track to surpass its official guidance of “high single digit revenue growth” and “service EBITDA margin around 34%” for the full year. We have slightly trimmed down our earnings estimates for FY07 and FY08 by 3% each to factor higher tax rate of 21% up from 18% assumed earlier.

Expect a stable 3Q07 to be followed by a strong 4Q07. Pay TV would be the weakest link in 3Q07 as amortisation of EPL content cost would kick-in, eroding the pay TV margins. The projected increase of S$4 in monthly fee of basic channels would not be sufficient to cover the higher cost of content. A hike of S$10 in monthly fee for sports channels would come into effect in 4Q07, thus helping to sustain the margins. We suspect, with more advertising revenue, StarHub would be able to stem the decline in pay TV margins in the next 6-9 months.

Recommendation
Maintain BUY at our DCF-based (WACC 7%, terminal growth rate 1%) 12-month target price of S$3.45.

Unclear picture on National Broadband Network (NBN). The request for proposal (RFP) for NBN should be out in 3Q07 and IDA is expected to award the project towards the end of 2007. StarHub is one of the 12 bidders, who have been prequalified by IDA. It will take another 3-5 years to build the high-speed network and the operator would need to provide access to the network at regulated prices to other service providers. In our view, despite government subsidy, the project cost would be substantial with a long break-even period. Moreover, a completely new network could introduce excess broadband capacity in the island, eroding profitability of all the players. Alternatively existing networks could be upgraded to provide high-speed broadband service rather than building a new network from scratch. IDA’s decision would be important in this regard.

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