StarHub – CIMB
Goodies priced in
• Downgrade to UNDERPERFORM. FY09 results were broadly in line, at 98% and 99% of our forecast and consensus respectively. StarHub declared a final DPS of 5 cts, taking full-year DPS to 19 cts, in line with our forecast. Key takeaways were: 1) weaker margins; 2) continued pressure in fixed broadband and fixed network services; and 3) a subdued FY10 outlook. We trim our FY10-11 EPS estimates by 2% and our DCF-based target price from S$2.15 to $2.14 (WACC 9.7%) following higher capex guidance and housekeeping adjustments. We downgrade the stock from Neutral to UNDERPERFORM following its recent strong share-price performance coupled with investors’ preference for cyclical stocks. We believe the stock has largely priced in its higher dividend payout and StarHub would face pricing and margin pressure from NGNBN. We recommend a switch to M1 (Outperform, TP: S$2.07), for its capital-management potential and benefits from NGNBN. We have introduced FY12 forecasts in this report.
• Slight seasonal bounce but margin weakness. Stripping away a 35% growth in handset sales, StarHub’s service revenue only climbed 1% qoq despite growth in all divisions except fixed network services. Like M1 (+1.6% qoq), StarHub’s mobile revenue rose 1.4% qoq, aided by increased usage, its iPhone launch and strong take-up of data services. Broadband revenue was flat qoq as a 2% subscriber increase was offset by a similar reduction in ARPU. EBITDA margin was down 4.4% pts qoq owing to higher acquisition costs from the expensing of iPhones and heavier promotions/marketing.
• Subdued 2010 guidance. StarHub guided for rather muted low-single-digit growth in FY10 topline. The growth would be aided by the economic recovery, the opening of two integrated resorts along with growth in mobile voice, mobile data, wireless broadband and fixed data, though offset by lower fixed broadband and pay-TV revenue due to competition ahead of the launch of NGNBN. It also expects a lower FY10 service EBITDA margin of 30% (31.7% in FY09) due to start-up costs for OpCo and its own RSP, broadband discounts, high content costs and iPhone subsidies. StarHub raised its cash capex to a maximum of 14% of sales from 13%. Finally, it kept its dividend policy of a minimum DPS of 5 cts/quarter for 2010.