StarHub – DBS
Lower guidance, vindicates our fears
At a Glance
• 4Q09 net profit of S$74m in line with our S$75m estimate, but below consensus forecast of S$82m. DPS of 5 Scts declared, as expected.
• 2010 guidance disappointing – street likely to cut FY10F/11F by 8-10%, closer to our forecasts.
• Capex guidance raised to 14% of sales (< 11% in 2009), implying 35% yoy decline in free cash flow, in our view.
• Maintain FV with TP of S$2.06 based on 12x FY10 PER. We doubt sustainability of 20 Scts DPS from FCF, amid earnings decline.
4Q09 results below expectations. 4Q09 net profit of S$74m (-15% yoy, -13% qoq) was below expectations of S$82m due to iPhone subsidy; also evident in lower mobile EBITDA margins. Mobile market share declined slightly by 30 basis points to 27.8%.
Weak 2010 guidance; FY10F could fall 8-10% yoy. (i) Low-single digit revenue growth; (ii) 30% EBITDA margins (31.8% in 2009); (iii) Much higher depreciation to sales ratio of 13% (11.3% in 2009); (iv) Capex to sales ratio of up to 14% (10.6% in 2009). Based on the guidance, FY10F could decline 8-10% yoy. We forecast a further 4% yoy decline in 2011F due to churn in its pay TV customers spilling over to other segments.
Lower EBITDA margins reflect pricing pressure in the broadband business; iPhone subsidies and the cost of new content in order to retain pay TV customers. Higher capex stems from OpCo capex, although OpCo revenue would be negligible in 2010. Management expects to spend less than S$100m OpCo capex in three years.
Doubts over sustainability of DPS of 20cts. We forecast S$300m, down 35% yoy, of free cash flow in 2010 (despite low cash tax) and S$290m in 2011 (cash tax kick s in) compared to S$343m dividend (20 Scts) commitment. Amid declining earnings, dividends could be sustained only by raising more debt, implying weaker share price once dividends are paid out.