StarHub – DMG

Back into the game

Better 3Q10. Starhub reported 3Q10 core earnings of SGD82m (-4% y-o-y/+41% q-o-q), bringing its 9MFY10 core earnings to SGD183m – 70% of our estimate and 72% of consensus. As expected, the slower pace of earnings in 1HFY10 was made up for by the stronger traction in 3Q10 amid lower content cost after cessation of the BPL rights and World Cup spending, which had crimped 2Q10 EBITDA. 3Q10 revenue rose 3% y-o-y/-3% q-o-q, driven mainly by stronger data revenue from smartphone usage. An in line 5 cents/share quarterly DPS has been declared, with a cumulative DPS of 15 cents/share on track to meet recurring guidance of 20 cents/share (excluding potential special payouts).

EBITDA margin back to ‘pre-BPL crisis levels’ as content cost falls. 3QFY10 EBITDA surged 22% q-o-q (+0.1% y-o-y) on: (i) sharply lower content cost, as reflected in the sharp decline in the cost of services line (-10.1% y-o-y/-28% q-o-q), and (ii) the 22% q-o-q fall in marketing cost (iPhone essentially sells itself). This brought about a 6.4%-pt rise in sequential EBITDA margin, translating into a 9MFY10 EBITDA margin of 26.9%, which was within management’s guidance and our expectations.

The worst is over for pay-TV; churn to normalize in 4Q10. Pay-TV subs contracted 4k in 3Q10 vs a flat 3Q10 as more sports subscribers churned post BPL/World Cup. This contributed to the 13% drop in ARPU, dragging pay-TV revenue down 16% q-o-q. The fall was nevertheless lower than the 48% reduction in Sports group subscription price (SGD12/mth), indicating that the bulk of its pay-TV subs have opted for dual set-top boxes. Management believes the worst is behind the company with churns normalizing further in 4Q10.

NGNBN still not meaningful. Management echoed earlier comments made by M1 on teething issues afflicting the NGNBN rollout. Starhub does not appear to be perturbed by potential competition from the individual Opcos being set up by Singtel and M1 to offer retail services on the NGNBN as it benefits from significant government grants.

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