StarHub – CS

2Q FY10: largely in line; earnings visibility remains poor

● StarHub’s 2Q FY10 operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn) while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively).

● Looking ahead, management maintained its full-year revenue growth guidance at low single digit and EBITDA margin at 28%. The company also maintained its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividend is sustainable. Taking the view that margins in 2H would improve, we fine tune our FY11/12E EPS by 1%.

● We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.

2Q results largely in line with our expectations

StarHub reported 2Q10 results on 5 August. Its operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn)

while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively). The 7% YoY growth in overall revenue was driven by a 10% rise in post-paid mobile revenue and a 9% rise in pay-TV revenue. The former was due to the growth in its post-paid subscriber base to 994,000 (from 910,000 in 2Q FY09). However, with COGS surging 26% YoY to S$251 mn, 2Q EBITDA fell 12% YoY (to S$141 mn) and 2Q net profit contracted 25% (to S$58 mn). In addition to a 65% YoY jump in cost of equipment (to S$81 mn), cost of services rose 21% YoY, as a result of higher pay-TV content costs during the period.

Higher mobile data usage offsets lower voice usage

While non-voice usage expanded further (to 34.6% of post-paid ARPU from 30.5% a year ago), voice minutes continued to fall (-12% YoY). As such, ARPU improved just 1% to S$70 (from S$69 during the same period last year). This supports our view that growth in data usage should help offset the decline in voice ARPU, rather than boost overall mobile ARPU. As highlighted in our Asia telecoms sector report, Smartphones – a welcome revenue boost, published on 2 February 2010, we expect overall Singapore mobile revenue to achieve a CAGR of 2% between 2009 and 2015. The corresponding growth rates for voice and data revenue are -4% and 19%, respectively. Driven by higher smartphone sales, acquisition costs per sub rose 38% YoY to S$109 (but fell 11% from S$122 in 1Q10). StarHub added 28,000 post-paid (1Q: 27,000) and 53,000 pre-paid (1Q: 30,000) subs during the quarter.

Looking ahead, management maintained full-year revenue growth guidance at low single digit (in view of the potential impact from the loss of Barclay’s Premier League broadcasting rights on pay-TV subs and the launch of the New Generation National Broadband Network in 3Q10) and EBITDA margin at 28% (versus 30% in 2009). StarHub is also maintaining its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividends is sustainable. StarHub’s 1H revenue and EBITDA accounted for 51% and 45% of our full-year forecasts, respectively. Taking the view that margins in 2H would improve, we marginally fine tune our full-year forecasts.

Maintain UNDERPERFORM

We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.

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