StarHub – DBS

Results & guidance lag expectations

Story: 4Q07 core net profit of S$71.0m (up10% y-o-y, down 13% q-o-q) was below our and consensus expectations of S$80m. A tax credit of S$27m resulted in net profit of S$98.3m. Besides management declared a final dividend of 4.5 cents bringing total dividend to 16 cents and guided for 4.5cents dividend every quarter.

Point: 4Q07 EBITDA margins were below expectations and FY07 EBITDA margins at 33.7% missed management guidance of around 34%. On outlook, management has guided for EBITDA margins of 33% and revenue growth of 10%. It is the first time that management has guided for lower EBITDA margins.

Relevance: Management guidance is inline with our FY08 earning estimates, which are 5% below the consensus estimates. StarHub trades at over 16x FY08 earnings, which is higher than SingTel’s valuation of 15x, despite StarHub’s lower growth prospects and long term risk from NBN. Maintain HOLD with DCF based (WACC 7%, terminal growth rate 1%) target price of S$3.10 with attractive 6% dividend yield. Although the company has potential for capital management at Net Debt to EBITDA ratio of 1.3x compared to a target of 1.5x-2.0x, management ruled it out in the first half of FY08.

High increase in equipment cost came as a surprise. Operating costs were higher than our expectations mainly due to (1) 71% y-oy increase in cost of sophisticated mobile and set-top boxes, which are getting more expensive and require more subsidies. (2) 71% yo-y increase service cost due to higher cost of content.

Market share loss continues for 3rd consecutive quarter. Mobile market share declined by 200 basis points y-o-y and 60 basis points q-o-q to 31.3%. Similarly for cable TV and broadband segments, despite higher equipment subsidies, subscriber growth has significantly slowed down compared to last year due to market saturation.

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