StarHub – DBSV

Good cash flow but earnings disappoint

At a Glance

Net earnings of S$58m disappoints, as content costs increase and handset subsidies continue

Free cash flow better than expected however, as capex of S$45m well below quarterly run-rate, plus working capital stays in positive territory

Dividend payout of 5.0Scts, as guided; we remain skeptical on dividend sustenance beyond FY10

Maintain Fully Valued call at TP of S$2.20

Comment on Results

While 2Q10 earnings of S$58m (up 36% q-o-q, down 25% y-o-y) recovered on a sequential basis, it still fell short of our expectation of around S$65m, largely because of higher than expected content costs of S$103m (up 21% y-o-y, 16% q-o-q), arising from the production costs and broadcast rights for the FIFA World Cup in June 2010, among others. Handset subsidies for iPhones continued to push up costs on a y-o-y basis as well, though equipment costs declined by about S$12m from 1Q10 levels. Mobile market share improved to 29.2% in 2Q10 from 28.4% in 1Q10.

Going forward, we continue to expect earnings recovery in 2H10, owing to lower handset subsidies and absence of one-off costs, and maintain our earnings estimates for FY10. Management continues to guide for i) low single digit revenue growth ii) 28% service EBITDA margins, and iii) a capex to sales ratio of up to 14%.

Recommendation

Low capex of S$45m in 2Q10 led to better-than-expected free cash flow of S$110m for 2Q10. An increase in payables for handsets also rendered working capital positive, boosting FCF. However, we believe a back-end loaded capex will lead to declining FCF in subsequent quarters. We still expect FCF to fall short of dividend commitments in future – if not in FY10 – as StarHub is committed to S$100m capex for NBN over 2010-12. Thus, we maintain our view that the 20Scts annual DPS may not be sustainable. Maintain Fully Valued; our DCF-based TP is unchanged at S$2.20.

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