StarHub – CIMB

A mixed bag

• In line. At 49% of ours and 51% of consensus, StarHub’s 1H09 core profit which rose 11% yoy, was broadly in line with ours and market’s expectations respectively. The declaration of a 4.5 cts DPS was as guided.

• Topline was fairly buoyant. Similar to M1, StarHub also posted a sequential growth of 0.3% qoq at the topline. This was led mainly by postpaid revenue (+3.6% qoq), which is 39% of total revenue, driven by higher take-up of data as well as stabilisation in roaming and IDD. Fixed network rose 1.1% qoq as data and Internet along with voice remained stable. On the negative side, broadband revenues dropped -3.4% qoq due to downtrading and discounts while pay TV saw a -1.8% qoq weakness as some subscribers terminated their sports package following the end of the BPL season, higher discounts and lower-take up of premium channels.

• Margins were down. EBITDA margins contracted by 1.3% pts qoq due to content cost escalation (+2.2% qoq) as it has been padding up its offerings with more channels and higher operating lease (+23.9% qoq). This was partially offset by lower staff cost. As a result, cable platform margins were driven down to the lowest since 4Q06. Meanwhile, operating leases were higher because of higher office leases as the group shifted to a new building on top of increased base station rentals to cater for its wireless broadband expansion and international lease capacity.

• Guidance for 2009. StarHub reiterated their 2009 guidance. To recap, StarHub sees stable service revenue, service EBITDA margins of 32%, cash capex of no more than 11% of revenue and a minimum 18 cts DPS for FY09.

• Maintain UNDERPERFORM, earnings forecast, and target price. We make no incisions to our earnings forecast and our DCF-based target price of S$1.58 (WACC: 9.4%, LT growth: 1%). Besides the key event risk of BPL, content costs have been rising where StarHub has little control over this line item in the medium term. StarHub hinted that it may share selected content to reduce cost but at the same time we think would devalue its unique and differentiated content offering of its pay TV business. We maintain UNDERPERFORM on de-rating catalysts of a) content warfare in 3Q, b) margin pressure from higher content cost, and c) further downtrading to broadband or pay TV.

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