StarHub – DBS

Higher dividends amid rising competition?

At a Glance

• Excluding S$3m forex gains, net profit of S$82m inline with consensus and our expectations.
• Raised dividend guidance, surprisingly, to 5 cents each quarter (4.5 cents earlier). The dividends may not be sustainable in the long term, in our view, and leave limited flexibility for the new CEO, joining in Jan 2010.
• Management mentioned that EPL loss should not be EBITDA and FCF negative, bit too optimistic in our view.
• Maintain FULLY VALUED in view of regulatory changes due to National Broadband Network and rising competition in the pay TV business, potentially spilling over to mobile business.

Comment on Results

3Q09 revenue of S$537m (+2%yoy, +1% qoq) and underlying profit of S$82m (unch. yoy, +5% qoq) after excluding forex gains were in line with our expectations. StarHub has achieved 77% of our FY09F forecast. 4Q is typically weak due to festive promotions.

Service EBITDA margins improved to 33.4% versus 31.5% in 2Q09. Mobile margins improved to 37.8% versus 36.8% in 2Q09, as StarHub was not overly aggressive in customer acquisition, as mobile market share declined slightly to 28.1% versus 28.4% in 2Q09. Pay TV margins improved to 21.4% versus 19% in 2Q09, which was impacted by one-off content costs in 2Q09. Fixed lines margins improved to 41.9% versus 38.3% in 2Q09 as StarHub benefited from higher contribution from corporate data business.

Recommendation

Annual DPS of 20 Scts implies annual dividends of S$343m, translating to earnings payout ratio of 118% on our FY10F estimates as we expect an 8% yoy decline in FY10F earnings. StarHub can still support the dividend payout in 2010, due to lower cash tax in 2010 but we are doubtful beyond that. Maintain FULLY VALUED. The stock trades at 6.1x FY09F and 6.3x FY10F EV/EBITDA compared to M1’s 5.9x and 5.7x EV/EBITDA respectively.

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