StarHub – GS
Below expectations: guidance for 2010E mixed; revenue slowdown
What surprised us
Starhub (STH) reported 4Q09 service revenue, EBITDA and net profit of S$521 mn, S$152 mn, S$74 mn: +1%, -7%, -14% yoy and 0%, -7%, -6% vs GSe. Key deviation from our estimates is on mobile SAC as STH introduced iPhone in December. Positives: a) sub adds pickup – broadband, cable TV and post-paid mobile adds all improved sequentially, the latter due to iPhone; b) churns remain manageable – pay TV churn is roughly flat qoq and broadband churn has fallen qoq, despite rivals getting more aggressive on both access and pay TV ahead of the NBN launch. Negatives: a) accelerating declines in broadband revenue – 4Q09 revenue was -8% yoy vs -3%/-6% for 2Q09/3Q09, due to ARPU declines; b) fixed network revenue trends also weakened, to +2% yoy vs +6-8% yoy the prior three quarters. We do not view higher SAC from iPhone as a negative necessarily as mgmt believes payback period is 2-6 months in Singapore and subscriber quality will improve, but would look for validation on returns in terms of ARPU /revenue pickup in coming quarters. Guidance for 2010E: 1) revenue growth of low single digit (vs I/B/E/S est flattish); 2) service margin of 30% (excl equip and Opco grant) (slightly lower than consensus of 31%); 3) capex not to exceed 14% (vs prior guidance/consensus of 13%); 4) S$0.05 DPS/quarter (unchanged).
What to do with the stock
We think STH faces meaningful operational headwinds/risks from NBN and pay TV and earnings/CF visibility is reduced. But, we believe 9% yield provides downside support. We prefer Mobile One (M1) in Sing telco space for its similar valuation/yield but offensive position / potential for mobile/NBN revenue share gains. We revised STH earnings by -13%/+15%/+13% in ’10E/11E/12E mainly to reflect iPhone/NBN upfront cost in ’10E and back-loaded benefits starting from 2011E. 12-m DCF TP is S$2.15 (from S$2.13). Still Neutral. Risks: Downside: broadband/pay TV share loss; Upside: b-t-e sub retention post NBN launch and EPL loss.