StarHub – CIMB

A weaker 3Q?

Potential disappointment in 3Q

Earnings disappointment. We expect StarHub to report 3Q results (Wed, Nov 5th) that will disappoint both the market as well as our own forecasts. As was the case with M1, the lingering after-effects of MNP could dampen margins and cause an earnings disappointment. For 3Q, we project net profit growth of 0-5% qoq but a decline of – 17% to -21% yoy. Revenue should remain relatively flat qoq but gently climb upwards by 4% yoy. EBITDA margins in 3Q should come in at a range of 27.6-28% which would be a similar level to 2Q08 margins of 27.6% or slightly better.

MNP after-effects, not as significant as other two competitors. The after-effects of MNP will be a key theme in the quarter with attention particularly focused on subscriber acquisition and retention cost (SARC). Unlike its other two main rivals, our view is that StarHub will be less affected relative to the two. It does not offer iPhones at the current moment (though it will by year end) which allows it to save on further subsidies. Also, it has not been as aggressive as M1 in offering promotional activities (e.g, free 6 month subscription for users migrating from other operators, multi-line savers and per-second billings). The investment quarter in 2Q should herald a bottom in margins in 2Q and downside risk to margins should be limited in 3Q.

Tougher operating landscape. Singapore’s advance 3Q GDP numbers showed that it has gone into a technical recession. The government lowered its 2008 GDP forecast to around 3% from 4-5% versus our own forecast of 2.5% for the year. In the last few months, StarHub has voiced concerns over a cutback in spending on telecom services just as SingTel issued similar pronouncements as well. That said, StarHub was still sticking to its 7% yoy revenue growth for 2008 vs our own at 6%.

Expect a 4.5 cts dividend. On the dividend front, we expect another 4.5 cts for 3Q, consistent with the minimum 18cts guidance for FY08 and we do not expect substantial payouts or special dividends. This is predicated on the need to conserve cash for an expensive content battle in 1HCY09 and until the outcome of OpCo is known in 1QCY09. This would bring the total dividend declared to 13.5 cts.

Prepaid and fixed broadband less competitive. Competition remains hypercompetitive in prepaid but should have eased off slightly. We believe that prepaid ARPU is likely to have hit the bottom in 2Q. Similarly, although StarHub has lowered its rates in fixed broadband to match M1’s entry, competition has been fairly rational as competitors have not reacted in kind.

Mobile broadband, a more keen battleground. In the last few weekends, StarHub announced that it would upgrade speeds on its HSPA platform to 5.76 Mbps from 1.9 Mbps for uplink speed by end Dec while downlink speeds will be upgraded to 21 Mbps from 14.4 Mbps by end 2Q09. This ups the ante on mobile broadband in the sector where heavy promotional activities and discounting have been characterising this segment.

Valuation and recommendation

Maintain earnings forecast, target price and UNDERPERFORM. While 3Q earnings could disappoint, we make no adjustments to our numbers currently but will likely make downward revisions once 3Q numbers are released. Our numbers for FY08 are already conservative and below consensus forecasts. Our target price stays at S$2.30 (unchanged WACC of 7.5%) but changes to the target price will be made once 3Q results are announced as we roll forward our valuation horizon by a year. We maintain UNDERPERFORM on de-rating catalysts of concerns over weaker-thanexpected revenue and the spiralling cost of content, particularly that of football. We advocate a switch into M1 for less risk to earnings and cash flow and attractive dividend yield of 10.5%.

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