StarHub – CIMB

A more starry hub

• In line, upgrade to NEUTRAL from Underperform. 3Q09 net profit was in line as 9M09 net profit forms 76% of our FY09 forecast and 77% of consensus. StarHub declared a 5cts DPS as it raised its payout policy, higher than the expected 4.5cts. We raise our FY09-11 earnings forecasts by 0-10% after: 1) removing all BPL costs from our assumptions but factoring in 5-10% churns for pay TV for FY10-11; and 2) updating our numbers to keep them in line with trends. Consequently, our DCFbased target price rises to S$2.15 from S$1.76, partially offset by a higher WACC of 9.7% from 9.4%, to reflect risks of losing more content or higher-than-expected churns. We upgrade StarHub to NEUTRAL following a less negative outcome from the loss of BPL, attractive yields of 10% and strong free cash flow yields of 10.6%. Meanwhile, M1 remains our preferred pick given its higher potential for capital management in 2010 and benefits from NGNBN.

• Revenue ticked up slightly. Topline was up 0.9% qoq, led by the mobile division’s (+1.8% qoq) subscriber growth, data and prepaid usage and equipment sales (+8.1% qoq). Pay-TV revenue and revenue from fixed network services were stable but broadband was weak (-2.5% qoq) owing to pricing pressure ahead of NGNBN and down-trading.

• Margins were surprisingly strong, advancing 1.8% pts qoq, from lower operating lease costs as the overlap of office rental expired in 1H09, lower marketing costs and lower cost of services. Notably, there were margin improvements in all divisions.

• Guidance kept but higher dividends. StarHub stuck to its guidance of stable service revenue, service EBITDA margins of 32% and cash capex of not more than 11% of revenue. Surprisingly, StarHub raised its FY09 DPS to 19cts from 18cts and promised a minimum of 5cts/quarter for the foreseeable future starting 3Q. We have raised our DPS forecasts to 19cts for 2009 and 20cts for 2010 to reflect this.

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