StarHub – AmFraser
Pay TV and broadband churns, more competition in 2H10
• StarHub Ltd’s 2Q10 results were in line with expectations, we maintain a full year net profit fall of 16% YoY, with fair value at S$1.88 and a SELL rating.
• 2QFY10 net profit fell 25% YoY to S$58.1mil, bringing 1HFY10’s fall to 37% YoY. Expenses mainly outpaced revenue.
• Higher mobile subscriber acquisition costs at S$109 in 2QFY10 (versus S$79 in 2QFY09) and higher content costs from FIFA World Cup in June dragged earnings. StarHub launched iPhones on 9 December 2009, pursuing a high-end handset sales strategy.
• EBITDA margins on service revenues of 26% in 2QFY10 and 24% in 1HFY10 were much lower than 31.5% and 32% for the previous corresponding periods, respectively. As in 1QFY10, management claims the hit was due to one-off effects and guides for 28% in FY10F.
• At topline, mobile services grew 8% YoY in 2QFY10 (making up 54% of service revenues), and helped boost total service revenues up 5% YoY. Mobile subscriber growth was a healthy 11% YoY to a base of 2.1 million. Postpaid ARPU held up well at S$70, though prepaid ARPU eroded to S$21, against S$69 and S$23 achieved in FY09 respectively.
• With loss of media rights to Barclays Premier League (BPL), Pay TV segment has started to show initial effects. Churn rose to 1.2% from previous norm of 0.9%- 1%, and 2QFY10 as the first quarter showed no incremental adds in subscriber base. ARPU was up by S$1 from 1QFY10 to S$56 – but this boost was driven only by subscriptions to FIFA World Cup for June- July.
• Worst is yet to come from the end of BPL in 2H 2010 – we are expecting 10% of subscribers to drop out, and ARPU to end at S$48 for FY10F and S$43 for FY11F. However, 2H 2010 will see the effect of lower cost of TV content upon the expiry of BPL contract. As such, this will spur a recovery in EBITDA margins.
• Competition ahead of NGNBN launch continues to take its toll on cable broadband. Despite increased discounts and shift in mix to more lower value plans, there were no incremental adds to subscriber base – with churn rising to a new quarterly high at 1.6%.
• Despite the commercial launch of Nucleus Connect (wholesale operator in NGNBN) in 2H 2010, we think it is early days yet – to expect a big impact near term. All in, management is guiding for low single digit topline growth for FY10F.
• Management expects to maintain DPS of 5 cents Singapore 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 would be most challenging. With 20% share price downside till fair value, yield will be wiped out.