StarHub – DBS
Margins improve, market share declines
Story: 3Q08 net profit came in at S$79.5m (-2% y-o-y, +24%q-oq). Excluding S$3m one-off gains, net profit was within our expectation of S$77m. However, revenue of S$524m was just short of our S$535m estimate, and service EBITDA margin at 32.9% was slightly ahead of our 32% forecast. As expected, an interim 4.5 cents DPS was announced with the results.
Point: Result highlights are as follows:
Positives. (i) Mobile EBITDA margin improved significantly to 39.5% from 32.6% in 2Q08 after StarHub offered lower handset subsidies and free six-months subscriptions. (ii) Cable & broadband EBITDA margins improved to 21.5% from 19.4% in 2Q08, due to absence of one-time cost for Euro Cup content.
Negatives. (i) Third consecutive quarter of revenue contraction. (ii) Mobile market share declined to 28.1% from 29.1% in 2Q08, mainly due to the loss of pre-paid subscribers. (iii) Post-paid mobile ARPU declined further to S$74 from S$77m in 2Q08 due to lower usage and free 6-month subscription plan.
No major risks to FY08 estimates. Management opined that 4Q08 was unlikely to see traditional festive promotions, as Telcos remain cautious of a slowing demand environment. As such, we think StarHub can meet our FY08 forecast, in line with its own guidance.
Downside risks to FY09 estimates. Potential outflow of workers and tourists, lower roaming revenues from corporates and tourists and lower broadband ARPU could lead to a weak FY09 guidance by management at the end of FY08. Although our FY09F earnings are 9% below consensus estimates, we believe there are still downside risks as topline growth can potentially disappoint.
Relevance: We maintain a FULLY VALUED rating for StarHub with a target price of S$2.34 pegged to 13x FY09F PER. This is the low end of its historical PER range of 13x-19x. Our trough valuation is S$1.67 based on 10x worst-case FY09F earnings, assuming Singapore GDP declines 2.2% in 2009. We prefer M1 (BUY, TP S$1.57) for its cheap valuations, low expectations and over 9% dividend yield.