StarHub – AmFraser

Strong showing against a depressed 2Q08

• StarHub Ltd’s 2Q09 results showed strong growth YoY only because 2Q08 was overall a depressed quarter. Recall that EBITDA margins dipped to 29% in the run-up to June 2008’s launch of Mobile Number Portability. As a result 2Q09 net profit rose 21% YoY to S$77.8mil on EBITDA margins of 31.5%, despite being 6% lower than 1Q09, which enjoyed a 33% margin. For 1H09, net profit rose 11% YoY to S$160mil.

• Second quarter of 2009 reflected a bottoming economy as service revenues rose a marginal 1% YoY and QoQ. Starhub’s growth was attributed to 1% YoY growth in mobile and 13% growth in corporate data and Internet. Mobile was helped by subscriber expansion, while corporate data is still off a low base. Mobile accounts for 53% while fixed services account for 16%, of revenues.

• StarHub added about 11,000 mobile subscribers per month in 2Q09, bringing its total base to 1.85 million, representing 1H09 growth of 3% YoY and 5% HoH. Its prepaid segment added more subscribers but ARPU slipped a small 4% QoQ to S$23. Postpaid however, saw a 3% QoQ pick up to S$69. With increased proliferation of smartphones, non-voice accounted for 30% of postpaid ARPU in 1H09 vs 24% in 1H08.

• The group’s cable TV and broadband revenues slid 2% and 3% YoY, respectively. Momentum maintained at 3,000 net adds for cable TV in 2Q, but ARPU fell 3% QoQ to S$56 as budgetconscious subscribers gave up some premium content. In similar vein, broadband added 6,000 subscribers but saw ARPU falling 7% QoQ to S$51 as more lower-value subscription plans and subscription discounts were taken up.

• Total expenses fell 2.4% YoY in 2Q09 mainly due to lower subscriber acquisition cost, marketing and promotion (as competition returns to a more rational state), as well as reduced staff costs on lower bonuses and benefits from Singapore’s Jobs Credit scheme. These more than offset higher content and traffic costs, and operating lease expense (relocation of its corporate office incurred duplication of rental).

• Content costs stood at 16.6% of service revenues in 2Q09, compared to 15.1% in 2Q08. While rising content costs has been a bugbear for the stock, we think StarHub will be able to manage higher cost content against the renegotiation of existing contracts that are expiring. Bidding for 3-year rights for Barclays Premier League is expected in two-to-three months time. Content accounts for 20% of total expenses in 1H09 and management feels 1H09 reflects the full extent of cost increases.

• On improving sentiments in the macro-environment, we have tweaked our key assumptions on the upside. This leads to a 3% and 2% upgrade in our EPS forecasts for FY09 and FY10, respectively. StarHub’s management has guided for revenues to maintain at FY08 levels, with EBITDA margins at 32%, for FY09.

• Its 2Q09 capex trended upwards to 13.6% of service revenues due to timing issues. However, management continues to hold full-year guidance at 11%. Their estimates also factor in requirements for wholly-owned Nucleus Connect, the OpCo in NGNBN.

• FCF was a strong S$148mil in 2Q09, while net debt to EBITDA improved to 1.1x. StarHub comfortably fulfilled its quarterly DPS of 4.5 cents Singapore and maintains this policy going forward. This puts annual yield at an attractive 8%. n We maintain HOLD rating and Fair Value at $2.28.

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