Starhub – DBS

Management lowers guidance

Story: Net profit fell 21% y-o-y to S$64.2m, lower than our below-consensus estimate of S$75m (consensus S$83m). This was due to 650 bps y-o-y decline in EBITDA margin to 28.9%.

Point: Lower margins were due to (i) decline in pre-paid mobile ARPU (-23% y-o-y, -10% q-o-q) and broadband ARPU (-5% y-o-y, -3% q-o-q) as a result of intense price competition (ii) Huge increase (41% y-o-y, 32% q-o-q) in marketing and promotional (M&P) costs ahead of MNP and (iii) a one-time increase of S$4-5m in content cost due to Euro cup rights. Going forward, we expect M&P and content cost to fall from 2Q08 levels. However, pre-paid mobile and broadband might continue to see competitive pressures. The launch of iPhone by SingTel, most likely in late Aug, could put fresh pressure on StarHub’s post-paid mobile business in 2H08.

Relevance: We have changed our valuation methodology to PER basis, given lower long-term earnings visibility. Based on its historical PER band (13.3x-19.4x), we peg our target price to 14x average FY08-09F EPS, comparable to SingTel’s 14.5x PER on FY09F EPS and M1’s 11.0x PER on FY08-09F EPS. Downgrade to FULLY VALUED with a lower TP of S$2.60. Management clarified that potential for capital reduction would depend on its decision to participate in the OpCo bidding. From StarHub’s track record, we see more likelihood of capital reduction than special dividends, resulting in additional cash yield of 3% assuming net debt to EBITDA (FY08) target of 1.5x.

Management finally lowers 2008 guidance. We had highlighted the risk to FY08 management guidance last quarter. Management has lowered its FY08 guidance for revenue growth to 7% y-o-y (from 10%) and EBITDA margin to 31% (from 33%), which are conservative. We have imputed 32% EBITDA margin in our FY08 estimates, assuming SingTel will cool off competition to fulfill its own margin guidance. We lowered our FY08F and FY09F earnings by 7.5% and 6.3%, respectively.

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