StarHub – CIMB
Hopes for margin improvements
• In line; maintain UNDERPERFORM. 1H10 core profit matched our forecast at 46% of our FY10 figure but was below consensus (43%). We expect stronger quarters ahead as the initial flood of iPhone subsidies should dissipate, higher ARPUs from smartphones should begin to offset subsidies in subsequent quarters and Barclays Premier League (BPL) costs come off the books in 2H10. As expected, a 5-ct DPS was declared. We keep our earnings forecasts and DCF-based (WACC 9.7%) target price of S$2.14. We still expect de-rating catalysts from pressure on broadband ARPUs ahead of the NGNBN launch and potentially higher churns in pay TV following the loss of its BPL rights to SingTel. We prefer M1 for exposure to Singapore telcos for its potential capital management and our view that M1 will be the biggest beneficiary of NGNBN.
• Revenue rose 2% qoq and 7% yoy, led by strong performances in pay TV and postpaid, offset by lower equipment sales from lower handset volumes and a slight decline in prepaid revenue qoq. Thanks to the 2010 World Cup rights, pay-TV revenue rose a strong 8% qoq. Excluding this, revenue would have been down 1% qoq. Postpaid revenue grew 4% qoq, driven by roaming and IDD as well as rising contributions from data.
• EBITDA improved. As guided, EBITDA margins improved 1.4% pts qoq because of lower iPhone-subsidies. Margins, however, were dampened by one-off World Cup costs as well as higher content renewal costs which caused cost of service to rise 16% qoq. Marketing costs were also higher (+9.4% qoq), related to the World Cup.
• No change to 2010 guidance. StarHub has kept its guidance of low-single-digit growth in revenue despite a 6% yoy rise in 1H10 so far. It is conservative as pay-TV revenue could decline following the loss of BPL going forward. There was no change to its service EBITDA margin guidance of 28% despite 1H10’s 25% as it expects a higher ARPU uplift from smartphones to overcome handset subsidies provided for them. Also, the heavy loss-making BPL content cost would come off the books in 2H10. Also, no change to the minimum 20 cts/share DPS guidance or cash capex not exceeding 14% of revenue.