StarHub – DBSV
Cash generation exceeds dividend commitments
At a Glance
• 3Q11 net profit of S$76m (-8% YoY, -3% QoQ) was 11.6% below our estimate due to higher costs. Declared 5 Scts DPS as expected
• Management guided for absence of cash tax in 2011F and minimal cash tax in 2012F, implying free cash flow will exceed earnings.
• Maintain BUY with DCF based TP (WACC 7.6%, terminal growth 0%) of S$3.05 for 7% yield and relatively resilient earnings.
9M11 net profit of S$223m (+22% YoY) made up 72% of our previous full year forecast. Operating expense of S$479m in 3Q11 was flat sequentially but higher than expected due to: (i) Equipment cost declined only 4% QoQ, while we had expected significant decline assuming lower take-up for iPhone plans before iPhone 4S launch. Instead StarHub re-contracted many of its customers whose two-year contract expired in 3Q11. (ii) Staff cost rose by 2% QoQ to S$70m instead of declining sequentially as temporary staff continued to work on single billing system and other initiatives. In view of margin pressure in 4Q11F due to iPhone 4S launch, we trim our FY11F earnings projections by 5% to S$295m, still up 12% YoY.
Free cash flow generation was the key positive. 9M11 free cash flow per share reached 24 Scts, higher than annual commitment of 20 Scts DPS. Management guided for zero and minimal cash tax in 2011F and 2012F respectively on account of certain group losses and capex related allowances. Management revealed that dividend paying entity has enough reserves to fund the dividends.
Pay TV subscriber decline & absence of gains in corporate business were key negatives. Pay TV subscriber base declined by 2K to 542K in 3Q11 offsetting the gains made in 2Q11. This can be attributed to StarHub ending certain price promotions. Most importantly, pay TV revenue was up 1% QoQ as ARPU improved slightly. Corporate business was stable QoQ as StarHub faced issues in accessing the customers, which regulator is currently looking into.