StarHub – DBSV

Keep an eye on free cash flow

2Q10F results to be released on 5th August; net profit should be in line while free cash flow may disappoint.

Market likely to focus on the non-mobile business prospects (40% of total EBITDA) in 2H10F.

If StarHub continues with 20 Scents DPS, equity could become negative in 2012F.

Maintain FV with DCF based revised TP of S$2.20.

We expect 2Q10F earnings of S$65m. Compared to 1Q10 earnings of S$43m, 2Q10 should benefit from (i) S$10m higher earnings in the mobile business as handset subsidies decline; and (ii) an absence of S$12m staff bonus costs in 1Q10. Going forward, we project 3Q/4Q earnings of S$77m/S$75m respectively.

2Q10F free cash flow (FCF) may be less than S$60m. We expect higher capex in 2Q10, as 1Q10 capex of S$49m was lower than quarterly run-rate of S$75m. Plus working capital could be negative in 2Q10 as payables were high in 1Q10. A back-end loaded capex may lead to declining FCF each subsequent quarter. We project FY10F FCF of S$251m compared to dividend commitments of S$343m. We could be wrong if FY10F capex is lower than our S$300m projection (14% of service rev). However, as StarHub has S$100m capex commitment for NBN over FY10F-12F, a lower FY10F capex implies higher capex in FY11F. If StarHub continues with 20 Scents DPS beyond 2010F, group equity could become negative in 2012F.

Non-mobile business would be the key focus. Non-mobile business would feel the heat from NBN and pay TV subscriber battles in 2H10F. The key question is whether gains in the corporate business can offset the loss in the consumer broadband business. We project non-mobile EBITDA to decline by 5% in both FY10F/11F. We cut FY10F earnings by 5% due to smartphone subsidies but raise FY11F earnings by 6% to reflect the revenue contribution of smartphone subscribers. As investors increasingly focus on FCF, we switch to DCF based (WACC 8.4%, terminal growth 0%) valuation, with TP of S$2.20

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