StarHub – DB

2Q10 missed but focus on the sustainable dividends

2Q10 missed DBe but maintain Buy for the sustainable yield

STH reported S$58m 2Q10 NPAT (-25% YoY), below Consensus and DBe’s S$65m, as EBITDA margin recovered slower than we expected. But revenues grew 7% YoY to a new high of S$569m and were slightly ahead of DBe (S$547m) and we believe STH’s margins and overall performance will continue to improve into 2H10e. Importantly, the 6.4c/share FCF was robust (128% of the 5c/share 2Q10 dividend) and continues to underpin STH’s long-term dividend sustainability – a key reason we still like STH and maintain Buy.

2Q10 revenues at a new high and 1H10 revenues trending in-line

2Q10 total revenues +7% YoY to S$569m and were slightly ahead of our expectations (S$547m) on strong mobile and cable TV revenue growth. Specifically, mobile revenues jumped 8% YoY to S$294m on increased IDD & roaming and data usage while 2Q10 cable TV revenues were boosted by the FIFA World Cup 2010 broadcast and rose strongly 9% YoY (excluding this, 2Q10 cable TV revenues would have been stable YoY). Elsewhere, 2Q10 fixed revenues +2% YoY, handset revenues +26% YoY (continued robust smartphone take-up) while broadband revenues fell 2% YoY (ARPU decline on subscriber dilution). Overall, 1H10 revenues reached S$1,127m and represented 51% of DB10e (S$2,195m).

But 2Q10 EBITDA margin recovered slower than expected

2Q10 opex rose 16% YoY to S$429m as increased smartphone take-up drove cost of equipment sold up 65% YoY while 2Q10 cost of services grew 21% YoY on higher costs related to the World Cup 2010 broadcast. As such, despite sequential margin improvement, the 2Q10 EBITDA margin was 5.5% pts lower YoY at 24.8% and below our expectations (26.5%) while 2Q10 EBITDA missed our estimate slightly (by 3%) and was down 12% YoY to S$141m. But management continues to expect sequential margin improvement over the course of 2010e and the previous EBITDA margin guidance (28% on service revenues) was maintained.

DCF-derived S$2.62 TP; key risks include content costs and competition

Our valuation is based on DCF using 7.2% WACC (2.8% risk free rate, 4.7% equity risk premium and 5% cost of debt) and 0% g to reflect the long-term growth potential of the Singapore telco market. Our TP implies a 7.6% yield. Key risks include content costs and competition.

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