StarHub – DMG

A small glitter

StarHub’s FY11 results were in line, with revenue up 3% while EBITDA rose by a stronger 12.3% y-o-y on good cost management and improved postpaid revenue. The steady core EBITDA margin for 4QFY11 was a pleasant surprise despite a jump in handset cost and given the acute margin pressure at M1 earlier. We tweak our forecast downwards by <1% for FY12/13 following the results and retain our DCF FV of SGD2.80 (WACC: 8.5%, TG: 1.5%). Starhub remains a NEUTRAL as its longer term prospects are clouded by the content carriage ruling, which dilutes its pay-TV franchise, and the competitive headwinds from NGN services.

Broadly in line. Starhub’s FY11 earnings of SGD315.5m appeared to be ahead of consensus and our forecast as 4QFY11 EBITDA surged 11% q-o-q due to the reversal of over-provisioning of staff cost in the earlier quarters. Stripping this out, its earnings were broadly in line. The 4QFY11 revenue growth of 10% q-o-q (+7% q-o-q) reflected the jump in handset sales (+80.3% q-o-q) as the iPhone 4S made its debut last October. Positively, its service revenue grew at the fastest in over 6 quarters, thanks to stronger growth in mobile (+3% y-o-y), pay-TV (+8% y-o-y) and fixed network (+4% y-o-y) revenue, which together contribute 81% of service revenue. We gather that StarHub benefitted from the typically stronger roaming revenue at the year-end, in contrast with M1, which earlier said its roaming revenue was weak and adversely affected by travelers purchasing local starter packs. The other key operational takeaways were: (i) the relatively stable cable broadband segment despite competition from SingTel and the NGN fiber service, and (ii) Starhub’s indication that handset subsidy remains sticky, implying subscriber acquisition cost should remain relatively high in the interim. StarHub did not disclose the number of fiber customers it had but we estimate this to be not too far from M1’s reported 22k.

Better able to monetize data. Starhub said that some 97% of the handsets sold were smartphones, with the take-up among its postpaid and prepaid base at 70% and 30% respectively (implying a smartphone penetration of 50% on its network). We note that StarHub successfully widened its postpaid ARPU over the past few quarters versus a decline at M1, which may reflect that it is better able to monetize data traffic, of which 30-40% is derived from smartphone users. Management acknowledges the shift towards tiered data pricing to further monetize data usage and will continue to monitor the competitive response in the market. On LTE, Starhub expects to roll out its service in 2H2012, with the availability of more devices then to support the launch.

Guidance. Starhub has guided for revenue growth of low single digit for 2012 and its 5 cents/quarter dividend payout, which translates into an attractive 7% yield. It expects capex to not exceed 11% of revenue, including SGD25m carried over from FY11.

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