StarHub – OCBC

3Q09 results above expectations

3Q09 results above expectations. StarHub Ltd reported a better-thanexpected set of 3Q09 results; revenue came in at S$537.1m (+2.4% YoY and 0.9% QoQ) vs. our forecast of S$534.0m; net profit came in at S$85.2m (+7.3% YoY and 9.4% QoQ) vs. our S$78.1m estimate. The main reason for the outperformance was improved service EBITDA (up 4.6% YoY and 6.9% QoQ, aided by higher fixed network margins). For 9M09, revenue inched up 0.6% to S$1600.1m, meeting nearly 74.5% of our FY09 forecast, while net profit climbed 9.6% to S$245.4m, or around 77.8% of our fullyear estimate. StarHub has increased its quarterly dividend from S$0.045 to S$0.05 per share – this is expected to continue into FY10.

Mobile segment remains strong. Its mobile segment continues to improve, growing 4.7% YoY and 1.8% QoQ; this as it added another 35k subscribers (22k in pre-paid). It was also able to sustain its post-paid monthly ARPU at S$69 and pre-paid at S$23, as well as reduce its acquisition cost to S$74 (vs. S$104 in 3Q08 and S$79 in 2Q09). Again, its broadband business was its worst performer, down 6.1% YoY and 2.4% QoQ, as monthly ARPU continues to fall, although churn has eased from 1.4% in 2Q09 to 1.2%. Lastly, fixed network services grew 6.3% YoY but down 0.2% QoQ; StarHub expects sequential growth to be flat due to an expected increase in competition ahead of the NBN launch in 1Q10.

Maintains outlook for 4Q09. Going forward, management has kept its guidance for 4Q09 but we are more concerned about the loss of its EPL and ESPN and STAR Sports content from mid-2010 onwards. While management believes that the loss is “EBITDA neutral”, where it expects to lose just 10% of its pay TV subscribers, we are less sanguine. Instead, we believe the loss is probably closer to 15-18% and it will also suffer a double whammy in terms of ARPU. Last but not least, it may also lose some of the stickiness needed to keep its “hubbing strategy” going. As such, we have adjusted our FY10 estimates accordingly to reflect our concerns (revenue down 12.8%, earnings down 11.4%).

Reducing fair value to S$2.29. While we have adjusted our FY09 earnings forecast by 2.2% to reflect the higher 9M09 showing, our DCF-based fair value eases from S$2.88 to S$2.29. But given the combined upside potential of 23.8%, we maintain our BUY rating.

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