StarHub – CIMB

Weak 3Q expected; shadow cast by BPL

3Q09 results preview

Maintain Underperform. StarHub will be releasing its 3Q09 results on 10 Nov. We are expecting a core net profit of S$75m-78m, flat to down 3.6% qoq on the back of a 0% to 2% decline in revenue. We expect margins to be flat qoq and a DPS of another 4.5cts, in line with guidance. We retain our earnings forecasts but raise our DCFbased target price to S$1.76 from S$1.58 (WACC 9.4%, LT growth 1%) following our rollover to CY10. Maintain UNDERPERFORM on potential de-rating catalysts from: 1) an expected spike in churns at its pay-TV division; 2) some unravelling of its hubbing model; and 3) prospects of losing more content to SingTel.

Revenue to be uninspiring. We are expecting revenue weakness at its mobile and fixed broadband divisions but stable pay-TV and fixed-network revenue on a qoq basis. As with M1, we believe StarHub’s mobile business (51.1% of revenue) came under pressure in the quarter from more competitive tariff plans, bundling discounts and lower roaming and IDD revenue. However, this could have been cushioned by wireless broadband growth as StarHub gained customers at the expense of M1. In fixed broadband (11.3% of revenue), downtrading had not fully played out during the quarter, which could continue to dampen ARPU and revenue. Pay-TV revenue (18.9% of revenue) is expected to be fairly stable as pay TV is one of the cheapest forms of entertainment in Singapore. Finally, in fixed network services (15% of revenue), we expect both the voice and data components to be stable.

Margins should be flattish. We expect flat margins in 3Q09 on the back of rising content costs due to step-up clauses in its content offerings and the addition of content. Cost of services, the bulk from content costs, made up about 15.9% of revenue in 2Q09. Moreover, with the growth in wireless broadband, we believe there would be more pressure on operating lease costs, which constitute about 7.7% of revenue, to cater for backhaul requirements.

SingTel unlikely to accept StarHub’s offer? StarHub has extended an olive branch to SingTel. It has offered to carry BPL matches over its cable platform for free. We regard this as an astute move to stanch potential customer defections come Aug 2010. However, we believe SingTel is unlikely to take up the offer because it:

• Could lose some control over the quality of its offering as programming is carried over StarHub’s network and through StarHub’s set-top boxes. This is probably why such a model has not been used anywhere else in the world.

• May introduce a more updated set-top box which offers greater functionality over StarHub’s to increase user appeal.

• Probably wants churners from StarHub to sever all relationships with StarHub. The continued use of StarHub’s set-top boxes would not achieve this.

Valuation and recommendation

Maintaining earnings forecasts and UNDERPERFORM rating but with a higher target price. We make no adjustments to our earnings forecasts but raise our DCFbased target price (WACC 9.4%, LT growth 1%) to S$1.76 from S$1.58 as we roll over to CY10. Maintain UNDERPERFORM on potential de-rating catalysts from: 1) a spike in churns at its pay-TV division; 2) an unravelling of its hubbing model; and 3) prospects of losing more content to SingTel. The rights to the football World Cup 2010 would be open for bidding at end-2009 and we believe SingTel will be aggressive.

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