StarHub – CIMB

The iPhones strike back

Below expectations; maintain Underperform. Excluding a one-off staff bonus of S$12m, 1Q10 core profit was below expectation at 19% of our FY10 forecast and 18% of consensus. The variance arose from higher handset subsidies (mainly iPhones). As expected, a 5ct DPS was declared. We cut our FY10 and FY12 core net profit estimates by 3-15% to reflect iPhone/smartphone subsidies, partially offset by higher ARPUs from smartphones. Our FY11 core net profit rises by 2% as higher ARPUs should start to offset margin hits over the life of the phones' 2-year contracts. Our DCF-based target price of S$2.14 (WACC 9.7%) is unchanged.

StarHub remains an UNDERPERFORM on concerns over pressure on broadband ARPUs from the launch of NGNBN, and heavier handset subsidies. We are also disappointed that it has discontinued disclosure of segmental margins. Switch to M1 which offers greater capital-management potential and growth, in our assessment.

Revenue inched up. Revenue improved 1% qoq with the help of all divisions save pay TV. Postpaid revenue (+2% qoq) was driven by strong net adds of 27K as StarHub aggressively pushed iPhones (launched on 9 Dec 09). Broadband revenue was flat as strong net adds were overshadowed by weaker ARPUs from discounts and a shift to lower-tier plans as StarHub penetrated new market segments. Pay TV (-1% qoq) declined as a higher subscriber base was offset by lower ARPUs from heavier discounting.

iPhones struck back. EBITDA margins (-3.3% pts qoq) dived from higher handset subsidies (+17% qoq), content costs (+7% qoq) and staff costs (+13% qoq excluding one-off bonuses). Thanks to a full quarter's worth of iPhone sales, handset costs accounted for 17% of revenue in 1Q10 from 15% in 4Q09. M1 was similarly affected by iPhone subsidies as its EBITDA margins shrank 5.7% pts qoq. Content costs rose as StarHub renewed more content and acquired some new ones. Finally, staff costs rose from higher salaries as competition for talent heated up on the back of a rapid economic recovery and lower Jobs Credit grants. Higher handset subsidies also forced StarHub to lower its service EBITDA margin guidance to 28% for FY10 from 30% before.

No capital management. Despite a fall in net debt/annualised EBITDA to 1.05x in 1Q10 which remained below its target of 1.5-2.0x, StarHub will not be undertaking any capital management in FY10.

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