StarHub – AmFraser

Better than expected 3Q09; dividends raised

• StarHub Ltd’s 3Q09 earnings came in better than expected with net profit at +7% YoY to S$85.2mil. We have raised FY09 EPS up by 2% to 19.1 cents Singapore.

• On the upside, mobile revenues grew 5% YoY to S$277mil, accounting for 54% of total service revenue. This was helped by 8% YoY growth in subscribers to 1.88 million while prepaid and postpaid ARPUs maintained at 2Q09 levels, at S$23 and S$69 respectively.

• Cable TV, its second largest revenue stream making up 19%, saw a pick up in net adds by 5,000 for the quarter to 535,000, with a similar ARPU trend at S$56.

• Fixed network revenues, which account for 16%, grew moderately at 6% YoY to S$80mil with growth in corporate data offsetting a fall in voice.

• But we are cutting our FY10 and FY11 forecasts by 3% each year to EPS of 18.0 cents and 18.7 cents respectively.

• On the downside, StarHub’s broadband revenue fell 6% YoY to S$59mil. While net adds slowed to 3,000 for the quarter, ARPU came in at S$50 versus S$51 in 2Q09 and S$57 a year ago. Management expects continued downward pressure on broadband ARPU due to the upcoming launch of Singapore’s new all-fibre Next Generation National Broadband Network (NGNBN) and guides that ARPU will likely trend towards S$45.

• Cost-wise, handset subsidies were higher than expected due to retention efforts as mobile churn rose to 1.2% from 1.1% in 2Q09. StarHub has also just obtained the distribution contract for iPhones, putting it on even keel with M1 and SingTel. Flipside is that we factor in higher handset subsidies going forward.

• On outlook, despite a 6% fall in earnings in FY10F from impact of the loss of Barclays Premier League and ESPN Sports content, StarHub’s cash flows remain strong. Full year savings in content costs will be felt in FY11, leading to EPS growth of 4%.

• Management is raising its quarterly DPS to 5 cents from 3Q09 (previously 4.5 cents). This amounts to 19 cents for FY09 and 20 cents for forecast years.

• We rate StarHub a HOLD with fair value at S$1.93. Dividend yield of 10% is highest among the three telcos. An improvement in newsflow for StarHub’s OpCo operation in the NGNBN from end 2009 into 1Q10 buoys prospects for StarHub in the mid-term. Market has not factored in the potential upside from this new revenue stream due to a lack of disclosure so far.

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