StarHub – ML
A year of reckoning
DPS of 20cps seems unsustainable; Maintain Underperform
We maintain Underperform rating post 4QFY09 results, which missed ours and consensus estimates. We believe that StarHub’s business model is facing unprecedented pressure on multiple fronts – intensified bundling discounts to defend pay TV base post EPL loss, spike in fixed broadband competition in runup to NBN rollout, mobile hitting low single-digit growth era with penetration >136%. This is likely to result in a structural FCF declines. We estimate StarHub’s FCF to average ~S$320mn p.a. for 2010-12 vs S$415mn p.a. in 2006-9. Hence,
we question the sustainability of the committed S$343mn p.a. or 20cps dividend.
Guidance suggests tough times ahead, declining FCF
Mgt’s FY10 guidance include low single-digit revenue growth, service EBITDA margin of ~30% (-1.8ppts YoY) and higher capex/sales of 14% vs 11% in 2009. We also understand that cash tax will start kicking in from 4Q10.
4QFY09 disappoints on margin pressure
4QFY09 EBITDA of S$152mn (-12% QoQ, -8% YoY) was below ours and consensus estimates. This was due to sharper than expected margin erosion from iPhone launch and pricing pressure at fixed broadband & fixed network services.
PO & f’casts raised; More +ve on ability to retain subs
We raise our PO by ~10% to S$2.00 and FY11-12E EBITDA by ~6% to reflect a more optimistic view of the EPL content loss impact on StarHub. We now only assume 10% of StarHub’s pay TV franchise will leave vs our previous view of 15% pay TV subscribers leaving and 50% of them walking with a mobile and fixed broadband plan. We think StarHub’s strategy of driving pay TV adoption by dropping prices, expanding content range and bundled discounts are likely to drive subscriber stickiness going into 2H10 when EPL moves to SingTel (SNGNF, S$2.98, B-1-8).