StarHub – DBS

Deteriorating market share and margins

Story: Excluding one-time tax adjustments in 1Q07, net profit grew 4% y-o-y but was 5% below our and consensus forecasts primarily due to lower margins. EBITDA margins dropped to 33.1% from 35.0% in 1Q07. As expected, StarHub declared an interim dividend of 4.5 cents per share.

Point: The lower margins in the cable TV business were in line, but the drastic drop in mobile margins was unexpected. In the pre-paid mobile space, ARPU tumbled due to an aggressive SingTel. Post-paid mobile ARPU was firm, but significantly higher equipment subsidies eroded margins. StarHub lost its mobile market share for the fourth consecutive quarter, which dropped by another 90 basis points to 30.4% sequentially.

Relevance: Ahead of full mobile number portability (MNP), we do not expect competition to ease. We maintain our earnings estimates for FY08 and FY09, which are 3.5% and 5% below the street estimates respectively. Maintain HOLD with our DCF based (WACC 6.2%, terminal growth rate 0%) target price of S$3.10.

Can management meet its guidance for 2008?
Management again guided for 10% revenue growth and 33% EBITDA margin in 2008. We believe revenue growth guidance is fair despite a healthy 13% revenue growth in 1Q08. About 50% of this revenue growth came from the mobile business, which should be flat in 2H08 y-o-y because of high post-paid ARPU base of S$78-79 in 2H07. Indeed, we are afraid that ARPU could fall if roaming revenue drop due to an economic slowdown. On the other hand, we believe there is downside risk to margin guidance (currently 33%) as 4Q margins are typically significantly lower than the rest of the year due to traditional promotions. This pulls down margins for the whole year, as in 2007.

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