StarHub – Daiwa
Potential profit-margin squeeze ahead of NGNBN
What has changed?
• StarHub held an investor conference call on 4 February for its FY09 results.
• StarHub’s FY09 net profit was slightly below our and the market’s expectations, mainly due to the festive-season promotion and the launch of the iPhone in early December, which drove equipment costs higher by 67% YoY in 4Q09, offsetting cost-saving efforts in the first three quarters in 2009.
• StarHub guided for ‘low single-digit’ revenue growth in FY10, a service-EBITDA margin of around 30%, and a capex-to-revenue ratio of not more than 14%, which would lead to higher depreciation of around 13% of operating revenue. We have revised down our net-profit forecasts by 12% for FY10-11, mainly to factor in the higher depreciation charge.
• Although the high-level of coverage of NGNBN (Next Generation National Broadband Network) could expand StarHub’s corporate coverage nationwide while the low wholesale price of the OpCo (operating company) could lead to saving in leasing expenses, it could lead to heightened competition, particularly in the broadband segment ahead of the network rollout, and erode the company’s profit margin.
• We lowered our six-month target price to S$1.92 (from S$1.99), equivalent to a PER of 11x our revised FY10 EPS forecasts, on par with StarHub’s Singapore telecom peers. The stock is now trading at 12.4x our FY10E EPS, a 5% discount to the average valuation for regional integrated operators.
Catalysts and action
• StarHub shares rose by about 3% one week ahead of the company’s results, due to what we think was an expectation of a positive 4Q09 earnings surprise. We believe the weaker-than-expected 4Q09 earnings (down 15% YoY), together with unexciting FY10 guidance, could create short-term pressure on the shares.
• Considering StarHub’s attractive dividend yield of 9.2% for FY10-12E, its valuation (12.4x FY10E EPS) appears undemanding. Nevertheless, SingTel’s (ST SP, S$2.98, 3) aggressive stance in the pay-TV market, which is the core of StarHub’s convergence strategy, could reduce the defensiveness of StarHub. Therefore, we maintain our 3 (Hold) rating.