StarHub – CIMB

A difficult 2Q

Results preview

Margin compression. We do not anticipate any surprises in StarHub’s 2Q08 results, which are scheduled for 6 Aug. We expect 2Q08 core profit to slip 1.2% qoq and 2% yoy. Although revenue should grow 2.4% qoq or 12% yoy, EBITDA margins are expected to come in at 30.5% in 2Q, vs. 31.3% in 1Q, as we believe StarHub’s margins will be compressed by higher subscriber retention and acquisition costs ahead of mobile number portability (as with MobileOne) and SingTel’s aggression in building market share. All in, we expect results to be in line with our expectations of FY08 revenue growth of 10% and core net profit nudged up 1% yoy.

Margin risks. Although churns from mobile number portability have been fairly limited thus far, a jostling for subscribers ahead of implementation could have squeezed margins in 2Q, on higher subscriber and acquisition costs. M1’s subscriber and retention costs rose 22.8% qoq and 38% yoy in 2Q while its core EBITDA margins declined 1.3% pts qoq.

Steady dividends. We expect StarHub to declare a DPS of 4.5cts for 2Q, unchanged from 1Q. We do not expect substantial increases in payouts until the results of its bid for the National Broadband Network’s Netco is known. We expect OpenNet, the SingTel-led consortium, to win the bid.

Prepaid impaired by competition. We will be looking for indications of any bottoming out for prepaid metrics:

• StarHub’s prepaid subscriber market share slipped 2% pts qoq to 34.1% in 1QCY08.
• Prepaid ARPU fell to S$22 in 1QCY08 from S$27 in 4QCY06.

This is worrisome, considering that prepaid revenue accounted for about 11.7% of StarHub’s 1QCY08 revenue. We expect these trends to persist in the foreseeable future until SingTel eases off its pursuit of market-share gains.

Valuation and recommendation

Maintain earnings forecasts, NEUTRAL rating and target price of S$3.20, still based on DCF valuation (WACC of 7.5% and terminal growth rate of 1.7%). Pressure on margins and market share exerted by a combative SingTel on top of the erosion of its broadband and prepaid franchise weighs on the stock.

On the flipside, attractive yields should cap downside risk for StarHub, in our opinion. Our above-consensus yield outlook of 9.4% for CY08 is the highest for Singapore telcos. This yield outlook is supported by free cash flow yield estimates of 9.3% for FY08 and expectations of OpenNet winning the bid for NBN’s NetCo. StarHub remains our preferred yield stock over M1 due to its more diversified earnings and higher management commitment to return capital than M1.

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