StarHub – BT

Citigroup, Aug 2

GOOD value but limited short-term catalysts: 2Q results and commentary reaffirms our view that the stock lacks immediate catalysts. That said, we think investors with a 12-18 month view should look to accumulate at these levels as cable TV tariff hike-driven profit upside and another capital management effort are catalysts in waiting into 2008. The assured 5.6 per cent yield limits downside risk.

Modestly softer 2Q results: Ebitda of S$164 million (+13 per cent year-on- year) in line but with S$5.3 million in one-time inter-carrier settlement credits. Net profit of S$80.8 million (+7 per cent year-on-year) was lower than our S$86 million estimate on higher (deferred) taxes. Lower mobile margins were the primary reason for lower-than-expected Ebitda.

Subdued margin guidance for 2H: The management flagged higher costs into 2H as the primary reason to maintaining 34 per cent service Ebitda margin guidance for the year (despite 35.4 per cent for 1H). The ‘high-single digit’ revenue guidance for the year is clearly conservative though, given 10.4 per cent growth in 1H and that cable TV tariff hikes kick in effective 2H – we have raised our topline expectations.

Changing estimates: Revenue estimates are up 1-2 per cent for 2007 and 2008 – still conservative, we think, as we attempt to bake in the cable TV tariff hikes. There is minimal change to Ebitda estimates as we factor in higher content costs. The 9 per cent cut in net profit estimates for 2007 primarily reflects a higher effective tax rate – all of this is deferred tax and does not impact cash flows though.

Higher DPS commitment of 15.5 cents for 2007: Versus 14 cents guidance earlier, this reflects a strong FCF profile, implying a sound 5.6 per cent yield.


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