StarHub – AmFraser

Hit on several fronts

• StarHub’s 1Q10 results were sharply below ours and market expectations with net profit fall of 48% YoY to $43 mil.

• We downgrade rating to SELL and cut Fair Value by 4% to $1.88, as we cut EPS forecasts by 11% in FY10F to 15.7 cents and by 6% in FY11F to 16.9 cents.

• Bottomline was hit mainly by surge in handset subsidies and staff costs. EBITDA margins plunged to 22.5% in 1Q10, from range of 29% to 33% across FY09. Management claims these were one-off effects and guides for 28% for FY10F.

• While equipment sales grew 33% to $30mil in 1Q10, equipment costs spiked 93% to $94mil. This brought subscriber acquisition costs to $122 from $77 in 1Q09 and $106 in 4Q09. Management claims they had taken much of the subsidies upfront starting from 4Q09, as they embarked on an aggressive pursuit of high-end smartphone subscribers. StarHub launched iPhones on 9 December 2009, a lag of 15 months behind first-mover SingTel.

• Staff costs jumped 29% YoY to $68mil, due to a one-off $12mil bonus charge as well as higher temporary headcount. As such, moderation in these costs in subsequent quarters will help recovery in EBITDA margins. In addition, 2H10 will see the effect of lower cost of TV content upon the expiry of Barclays Premier League contract.

• Service revenue grew 4% YoY to $527mil, larged helped by 8% YoY growth in mobile. Subscriber net adds were stronger than rival M1’s – at 9,000/month for postpaid and 10,000/month for prepaid. We revise forecast base up by 2% each year. ARPUs held fairly well; and management expects benefits from an increased smartphone base to filter through from 2H10.

• Pay TV continued to add 2,000 household subscriptions in 1Q10 to 541,000, but revenue was flat YoY as ARPU eroded marginally to $55. But the worst is yet to come from the end of BPL in 2H10 – we are expecting 10% of subscribers to drop out, and ARPU to end at $48 for FY10F and $43 for FY11F.

• Competition ahead of NGNBN launch continues to take its toll on cable broadband. With increased discounts and shift in mix to more lower value plans, StarHub added 8,000 subscribers in 1Q10. However, erosion in ARPU to $48 led revenue fall of 5% YoY.

• Wholly-owned Nucleus Connect (wholesale operator in NGNBN) will launch commercial service in 3Q10. Buy we think it is early days to expect a big impact in the near term as the addressable coverage is only about 20%. All in, Management is guiding for low single digit topline growth for FY10F.

• Despite a challenging year ahead, Management expects to maintain DPS of 5 cents per quarter. This puts current yield at attractive 9% p.a. However, with payout ratio exceeding 100% and projected Net Debt/EBITDA rising to 1.5x in FY11F, we feel maintaining DPS will be threatened. With 20% share price downside till FV, yield will be wiped out.

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