StarHub – DB

4Q09 below DBe on weak margins but yield sustainable


4Q09/FY09 profit below DBe but Buy for the yield

STH’s S$74m 4Q09 NPAT was below our S$78-80m forecast as mobile margins compressed to recent lows on the iPhone launch. As a result, FY09 total profit at S$320m was S$9m/3% below DBe. But FY09 free cash flow at 27c/share was better than expected and STH is still targeting a minimum FY10e 20c/share dividend – a target we view as achievable even given FY10e capex guidance. We therefore maintain Buy for the 9.2% yield and STH is our preferred S’pore telco.


4Q09 margin weakness distracts from good revenues

The key 4Q09 theme was the significant mobile margin compression which drove total EBITDA down 12% QoQ and 8% YoY to S$152m giving a 27.7% margin (the lowest since 2Q08). There was similar substantial compression in fixed margins. But this margin weakness masked strong revenue performance with both 4Q09 total and service revenues hitting new quarterly highs primarily on good mobile performance, e.g. the best post-paid mobile net adds since 3Q08 and mobile ARPU stabilization. 4Q09 service revenues were up 1.3% YoY to S$521m and the S$2,150m total FY09 revenues were slightly ahead of DBe.


4Q09 NPAT lowest since 2Q08 but dividend stable

As expected, STH’s 4Q09 profit benefited from a net tax credit adjustment but even so, the S$74m profit was down 15% YoY and 13% QoQ. Total FY09 profit at S$320m was up 3% YoY giving 18.7c EPS. But the 27c FCF/share is significantly ahead of the FY09 dividend per share and the company remains committed to its FY10e 20c/share dividend target. Given STH’s balance sheet, this is achievable despite guidance for FY10e capex to increase to 14% revenues (DBe 13%). Furthermore, management is more confident than DB on revenue outlook with FY10e revenue growth guidance set at “low single digits” versus DBe’s -3%.


Maintain Buy as still our preferred S’pore telco

We maintain our S$2.35 target price. Our valuation is based on DCF (7.2% WACC, 0% g) and our target price implies an 8.5% yield at a target 12.4x FY10e PE. Given the 8% upside to our target price and 9% sustainable yield, we reiterate Buy and STH remains our preferred S’pore telco and one of our recommended Asian yield telcos. Risks primarily relate to content costs and competition

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