StarHub – Kim Eng

Going for the Gold

Expect earnings to rebound in 1Q12. StarHub will report 1QFY12/12 results on 4 May. We expect net profit of SGD85m, up 8% QoQ from an adjusted SGD79m. Given its rather lazy balance sheet currently, we will be on the lookout for indications of a dividend hike in coming quarters, but even without any, the current yield is still attractive at 6.3%. Given its recent outperformance, the stock may pull back before re-rating further, but fundamentally, we maintain our BUY call with a higher target price of SGD3.50, based on the average 5.7% yield of the top 15 dividend stocks over a billion in market cap.

Margins should rebound. For one thing, we do expect margins to bounce back in 1Q12. Similar to M1, margins should recover QoQ. In 4Q11, handset subsidies pushed EBITDA margin to 30.7% (excluding capex writebacks), although the severity was much less than the other telcos. Relieved of this pressure, we expect margin to rebound toward 32% in 1Q12. Nevertheless, our full year forecast assumes a lower 31% margin, reflecting higher cost pressures in 2H12.

Mobile business should continue to outperform. In addition, mobile should grow QoQ despite lower seasonality, for a couple of reasons. One, we believe StarHub has gained market share at the higher end of the market, with its postpaid base now skewed more toward the higherend SmartSurf plans. Two, we expect data revenue to continue to benefit from higher penetration for smartphones and tablets.

Pay TV should also get a price hike kick. Last Aug, StarHub raised its Pay TV basic rate by SGD2, which stemmed the decline in Pay TV revenue that started after the loss of BPL. 1Q12 should continue to reflect this increase. However, margins may be squeezed slightly by operational costs related to cross-carriage ahead of the UEFA Euro 2012 games that will kick off in Jun 2012.

What to look out for. In particular, we would be interested in whether StarHub will utilise its currently under-utilised balance sheet to raise dividend payout this year. In 2006 and 2007, it had made two rounds of capital returns when net debt/EBITDA fell to current levels. Further, it has raised dividends every year except 2010 and 2011. Looking at its forward cashflow and capex needs, we reckon it is in a good position to increase dividends beyond SGD0.20 a share.

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