Starhub – OCBC

Disappointing 2Q08 results

Disappointing 2Q08 results. StarHub Ltd posted a disappointing set of 2Q08 results. Although revenue rose 8.6% YoY to S$531.4m, it was down 0.7% QoQ, missing both our S$540.2m estimate and the street’s S$552.5m figure. Meanwhile, net profit tumbled 20.5% YoY and 19.9% QoQ to S$64.2m, way shy of our S$76.2m estimate and the street’s S$83.6m number. Management attributed the sharp earnings decline to three reasons – 1) a 4% fall in mobile pre-paid revenue; 2) increased acquisition & retention costs; and 3) higher Pay TV content costs. Together, these resulted in a compression of EBITDA margin from 33.5% in 2Q07 (31.4% in 1Q08) to 27.6% in 2Q08. On an interim basis, revenue rose 10.9% to S$1066.3m, meeting 48.2% of our FY08 estimate, while net profit fell 4.3% to S$144.3m, or 43.1% of our FY figure.

Intense competition in mobile segment. Mobile business sales rose 6.5% YoY (down 1.4% QoQ) to S$269.3m, or about 50.7% of total revenue. Although StarHub recorded its highest quarter net adds (36k) for its postpaid segment in over five years, its pre-paid segment saw a 40k net drop after it failed to respond promptly to a competitor’s aggressive strategy. And as expected, average acquisition cost jumped by another 19.4% QoQ (+27.8% QoQ in 1Q08) ahead of the implementation of true mobile number portability (MNP) in June 2008. But on the flip side, StarHub has managed to reduce its churn rate to 0.9%, the lowest level since 4Q05.

Slower growth and lower margin expected. Going forward, management has moved to slash its revenue guidance from 10% previously to 7%, citing flat pre-paid revenue growth projection. In addition, StarHub has cut its EBITDA margin guidance from 33% previously to 31%, even though it expects the aggressive handset subsidies to ease towards the end of the year. However, it kept the total dividend payout of S$0.18/share for the year; it has also made S$0.045/share for 2Q08. In light of the latest developments, we have cut our FY08 forecast for sales by 3.3% and earnings by 9.9%.

Fair value eases to S$3.19. Our DCF-based fair value also eases from S$3.51 to S$3.19. Given the disappointing 2Q08 results and more muted outlook, we do expect the stock to suffer some near-term weakness, which we view as a good entry point. We still like StarHub as a defensive play with its still attractive 6.5% dividend yield for this year, and hence we retain our BUY rating on the stock.

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