StarHub – CIMB

Less starry 1Q

Below; maintain Underperform. 1Q11 annualised results were below consensus and our expectations, by 10% and 16% respectively. The underperformance was due to higher-than-expected marketing and handset costs. As expected, a DPS of 5cts was declared. We cut our FY11-13 estimates by 4-9% on lower EBITDAmargin assumptions. This brings down our DCF-based target price to S$2.41 (WACC 9.7%) from S$2.50. Maintain UNDERPERFORM on concerns over competition from NGNBN in fixed broadband and pay TV which could add to margin pressure and cross-carriage regulations that could further erode its dominance in pay TV in the mid-to-long term. These are expected to de-rate the stock. M1 is our top Singapore telco pick.

Margins were the key feature. Contrary to expectations, EBITDA margins fell 1.7% pts qoq due to higher marketing expense (despite a seasonally weaker quarter) to drive take-up while handset costs (+10% qoq) rose from strong smartphone take-up. This overshadowed a decline in content, operating lease and maintenance costs. We believe margins will hover at these levels as StarHub shores up its fixed-broadband and pay-TV businesses through more acquisition/retention exercises and as more NGNBN-related costs flow in. Revenue was fairly flat qoq as weak mobile revenue (-2% qoq) was compensated by strong handset sales.

By division. StarHub lost 5K postpaid subscribers qoq from the delayed effect of churns and substitution of data-only plans for other smart devices or more data/voice bundles. This, coupled with seasonality, caused postpaid revenue to fall 2% qoq. Fixed-broadband ARPU slipped to S$45 from S$46 on lower-ARPU net adds and more discounts. StarHub guided that ARPU should be S$44-45 going forward. In pay TV, it added a surprisingly strong 4K qoq (net) following discounts, free previews, free months, breadth of content as well as an increased focus on the lower-income segment.

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