StarHub – Kim Eng
Hold on for more
Hold on despite possible 4Q miss. StarHub is slated to release its full-year FY11 results on 2 February. We would not be surprised to see a lower-than-forecast net profit, given the stronger-than-expected demand for iPhone 4S. On the bright side, competition is easing and we expect content costs to remain subdued while its low gearing suggests the potential for dividends to be maintained and even enhanced this year when economic headwinds die down. Maintain Buy.
Expect subdued margins. Our full-year revenue forecast of $302.7m suggests a 4Q11 net profit of $79.8m and EBITDA margin on service revenue of 31%. While this is in line with management’s full-year guidance of “about 30%” (9M11 margin was 30.4%), we would not be surprised by a lower-than-forecast EBITDA margin in 4Q11 due to the robust demand for iPhone 4S.
Good and bad of strong iPhone 4S demand. Despite the slight difference between iPhone 4 and iPhone 4S, the demand for the latter has been unusually strong since its launch last October, and is likely to last into 1Q12. While bad from a subsidy perspective, the robust sales were good in that they suggest data usage by iPhone 4S users is twice that of iPhone 4 users and three times more than 3GS users, likely due to Siri. Better data monetisation in future should bring benefits to ARPU.
Competition easing, content costs under control. On the bright side, competition in broadband and Pay TV appear to have been tamed, and content costs should remain subdued, as challenger SingTel is likely to hold back from making aggressive moves now that the cross-carriage law is in effect. For example, it did not push aggressively for the World Cup or Fox International Channels.
Dividend likely maintained, with scope for a raise. StarHub will likely keep its DPS at 20 cents in 2012. It could even pay more, as competition has eased and gearing has fallen. Net debt/EBITDA hit 0.69x in 3Q11, giving it ample headroom to its target of 1.5x. Assuming a range of 1-1.2x, StarHub could pay 6-15 cents more on top of the regular dividend. The last time it did a capital reduction was in 1Q07 (25.6 cents a share) when gearing fell to 0.7x. Reiterate Buy.