StarHub – DBSV
Wait for better entry point after recent outperformance
• 1Q11 net profit of S$69m was at the lower end of expectations due to higher iPhone4 sales.
• Surprisingly, subscriber base declined for postpaid mobile and increased for pay TV & broadband segments.
• Declared expected 5 Scts quarterly DPS. Downgrade to HOLD for limited 3% upside potential to our TP.
profit stood at S$69m (+60% YoY, -14 QoQ) versus our estimate of S$72-74m. Key reason was higher costs including (i) equipment costs which rose sequentially by S$8m to S$84m due to higher sale of iPhone 4, indicating slow adoption of Android phones in Singapore (ii) marketing costs rose sequentially by S$5m to S$42.5m due to promotional initiatives to drive take-up of multi-services hubbing packs.
Subscriber base declined across mobile but increased for pay TV & broadband. Post-paid mobile subscriber base declined by 5K sequentially to reach 1031K, due to: (i) some customers switching from data-only plans to bundled voice & data plans, and (ii) churn initiated by StarHub for non-paying customers subsequent to the implementation of business support system in 4Q10. This decline was one-off and management expects to see higher mobile subscriber base going forward. Higher marketing costs, on the other hand, boosted sequential growth in subscriber base for (i) pay TV by 4K to 542K and (ii) broadband by 3K to 325K.
Downgrade to HOLD. StarHub has outperformed STI by ~7% year to date excluding its quarterly dividends. We see limited upside potential of 3% to our DCF-based (WACC 7.6%, terminal growth 0%) TP of S$2.90. However, 7.1% dividend yield continues to be the key attraction of StarHub. We prefer SingTel as a cheap proxy to Bharti’s growth with a cushion of 6% yield.