StarHub – CIMB

Loosen up, please!

1Q12 core net profit beat our forecast by 4% on strong margin and low depreciation, but we consider it in line as margins may come under pressure from subsidies later this year. StarHub’s performance is 9% above consensus. It also declared a DPS of 5 cts, as expected.

Despite net debt/EBITDA falling to 0.49x from 0.65x qoq, StarHub has no plans to raise its 2012 DPS of 20 cts. We think it should loosen its dividend purse strings. We raise our DCF-based target price to reflect its lower net debt. StarHub remains an Outperform, with expectations of higher dividends being a key catalyst.

A commendable quarter

StarHub’s operational performance was broadly in line except that marketing expenses came in below expectations (Figure 1). This should normalise later in the year, especially when a new device is launched. Broadband ARPU rose for the first time (Figure 4) since its steady decline triggered by competition with SingTel. On the other hand, churns for fixed broadband and pay TV rose on customers not re-contracting after the promotions ended.

No capital management

Net debt/EBITDA fell to 0.5x, the lowest since mid-06 (Fig 3), driven partly by the regulator reimbursing S$44m (2.6cts/share) for reaching NGNBN rollout milestones. Despite the very low gearing, StarHub is maintaining its DPS of 20cts/year for FY12 and it has no plans for any capital management this year. Management acknowledges that gearing is very low but said its conservative stance hinges on competitive and economic uncertainties. We are disappointed by this and believe StarHub is overly conservative and should loosen up its dividend purse strings.

Competition to pick up

Management thinks that competition and subsidies may rise again with the launch of new devices (i.e. iPhone 5). It nevertheless expects subsidy/unit to trend down over time. StarHub noted that Android phones, which are cheaper now, make up 50% of sales with Apple making up the remaining 50% vs. 25%/75% Android/iPhone 6 months ago.

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