StarHub – OCBC

Domestic play with minimal earnings risks

Defending its turf. StarHub recently reported an impressive 3Q07 results with a 16% YoY increase in 3Q revenue to S$460.6m and with net profit up 25% YoY to S$81.4m. EBITDA improved 22% YoY to S$156.6m due to slower cost escalation, and this led to margin expansion to 35.7%. All business units did well, registering double-digit revenue growth. StarHub managed this despite the onslaught from its much bigger rival in almost all its business segments.

Mobile continues to dominate. On the mobile front, StarHub continued to grow with revenue up 11% YoY to S$233.7m in 3Q. Sequentially, subscriber growth was 3.0% and revenue growth was 5.3%, implying OEM of 1.75x. This is even more remarkable as growth came from the price sensitive prepaid segment and despite SingTel’s aggressive strategy to capture market share. Going into 2008, with the introduction of number portability, we expect competition to become more intense. However, if StarHub remains disciplined in its focus on profitability (as opposed to market share), it is likely to continue to deliver growth.

Cable TV to see stiff competition. In 2008, we anticipate SingTel to ramp up its promotion of Mio TV to try to capture market share. However, until SingTel improves on its content offerings, StarHub is likely to reign supreme in this area. As for margins, the recent revision of rates should arrest any decline post the EPL rights.

Upgrade to BUY on low earnings risks. Starhub’s investment case remains its domestic exposure and its ability to continue to provide growth from a mature market via innovative marketing strategies such as its bundling of services also known as Hubbing. Furthermore, even in the face of the onslaught from SingTel to garner pre-paid market share, StarHub remains steadfast and somehow has managed to balance subscribers’ growth with revenue growth to provide OEM of over 1.5x. Even on the pay-TV space, it continues to reign supreme and we do not see SingTel’s Mio as likely to threaten its supremacy in content in the short to medium term. Since our downgrade to HOLD in early Nov, StarHub has corrected by about 4%. At present trading range, we see meaningful upside. This together with a dividend of 16 cents (5.3% yield) and the fact that it is a pure Singapore play make StarHub an attractive alternative and safer proposition. We thus upgrade StarHub to BUY with a revised fair value of S$3.41.

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