StarHub – MacQuarie
Let’s look beyond the immediate
• Looking beyond StarHub’s 2Q CY10 results, which disappointed on margins, we expect margins to improve in 2H CY10 and earnings growth to return strongly in CY11. We believe investors need to focus on the various changes that are in the offing in 2H CY10 (upside on corporate data from NGNBN, higher postpaid ARPU from smartphone data usage and lower-than-expected TV subs loss). StarHub remains a high dividend play (8.5% dividend yield), and we maintain our Outperform rating, while trimming our target price to S$2.62 from S$2.64.
• Immediate concerns being addressed: After 2Q results, investors may be wary about a margin decline and potential Pay TV subscriber loss to Mio.
Concern 1: Margins – EBITDA margin decline to 23.0% from 31.1% in 1H CY10 affected by one-offs like higher production costs from World Cup and a S$12m staff bonus. We expect margins to recover in 2H CY10 to about 27.5% and to remain around that level in CY11.
Concern 2: Pay TV subs loss – Despite the loss of BPL rights to SingTel, the subscriber base remains at 541,000. Although we assume a 7% decline, we think StarHub can retain subs by offering new channels.
Concern 3: Sustainability of dividends – Management remains committed to a S¢5 dividend per quarter, sustained via FCF. We expect StarHub to sustain around S¢19 dividend payouts in CY11 and CY12.
• Need to focus on the broader changes and the impact: We believe broader changes like impact from NGNBN and smartphones need attention.
Change 1: NGNBN – Potentially launching by October 2010, it provides strong upside for StarHub on the corporate data front, with much larger access to corporates and SMEs (24,000 buildings vs only 800 now).
Change 2: High smartphone usage – Increasing smartphone penetration driven by new Android-based phones and iPhone 4 could increase data usage in long term, positively affecting postpaid ARPUs.
Change 3: Pay TV – Despite the BPL rights loss to SingTel, StarHub remains the leader in Pay TV, with more channel offerings (locked in for three years), attractive packages and constantly improving telecast quality.
Earnings and target price revision
• Sequentially, we cut our EPS estimates for the next two years by 16% and 5%, respectively. We trim our TP to S$2.62 from S$2.64.
• 12-month price target: S$2.62 based on a DDM methodology.
• Catalyst: Margin recovery in 2H CY10 and NGNBN launch.
Action and recommendation
• We expect positive news flow in terms of margins, upside from the NGNBN launch and continuity of high dividend payouts to keep the stock firm despite weak quarterly results. Maintain Outperform with S$2.62 price target.