StarHub – CIMB

A star-crossed 4Q?

4Q08 results preview

StarHub is slated to release its 4Q08 results on 10 Feb 09. We expect a core net profit of S$75m-80m, representing flat growth to a 6% contraction qoq as some margin tremors are likely to be felt due to heavier expenditure in the festive period. Yoy, core net profit should be up 6-13%. FY08 core profit is projected at S$299m-304m.

Topline is expected to rise 2-4% qoq, lifted by the festive period, and representing a reversal from 3Q08’s 1.2% qoq contraction. Over the past three years, 4Q revenues have been rising by an average 4% qoq, thanks to the festive season effect. This year, however, harsh economic conditions might have had some impact on StarHub’s topline in 4Q. As such, we believe FY08 revenue may only rise 6%, slightly below StarHub’s guidance of 7% growth.

More pertinently, we expect EBITDA margins to lose close to 1-3% pts in 4Q from a surprisingly strong 3Q. In the past three years, EBITDA margins have been declining on average by 2-4% pts qoq in 4Q. Thus, we are projecting fairly in-line service EBITDA margins of 32% vs. guidance of 31% for FY08. While mobile number portability-induced margin tremors could have faded away and we do not expect a return to those levels, we believe that some margin strain could still occur due to the traditional festive season where A&P expenses tend to rise and the bulk of costs are booked in 4Q. That said, we do not think the impact will be as severe as in most years, judging from the relatively quiet 4Q.

We would be looking for signs of downtrading for StarHub’s suite of products, namely in broadband and cable TV, as consumers tighten their belts.

Dividends. We do not anticipate anything out of the ordinary, with another 4.5cts likely to be declared in 4Q, bringing full-year payout to the minimum 18ct guidance. A special dividend is unlikely with gearing remaining high at 1.2x annualised net debt/EBITDA as at end-3Q08. Historically, StarHub has undertaken capital reduction or special dividend payment only when the ratio trends below 0.8x. What lends further weight to our belief is the tender process for OpCo, which is still in the pipeline. The results of the tender will be made known sometime in 1QCY09, and we do not foresee any payout, if at all, until the outcome is known. The need to conserve cash is paramount under current economic circumstances.

Valuation and recommendation

Maintaining earnings forecasts, DCF-based target price of S$2.50 (WACC: 8.5%, terminal growth: 1%) and Neutral rating. We leave our estimates and rating untouched pending the release of the results, although we are likely to lower our target price post-results. With its diversified base, we believe StarHub’s revenue is most susceptible to an economic downturn. The key event looming this year would be bidding for premier content, most notably that of the British Premier League (BPL) for 2010-2012 and the 2010 World Cup in 3Q09, where a brutal bidding battle is expected. The potential setting up of Premier League TV, while slim at this juncture, could undercut StarHub’s monopoly of the crown jewel of content. Nevertheless, despite the many risks, we maintain our Neutral rating as we believe downside will be limited by its attractive dividend yields of 9%.

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