StarHub – DBSV

Great quarter but costs may rise in coming quarters

Net profits of S$88m were 10% ahead of expectations; due to lower handset subsidy and traffic costs.

Management has ruled out capital management in FY12F but has maintained guidance of 5 Scts DPS each quarter.

Our DCF-based TP raised to S$3.10 as we raise FY12F earnings by 5% and roll forward our valuation base. Hold for 6% yield, however stock is not cheap at 17x FY12 PE versus historical average of 14x.

Highlights

Prudent cost management lifted earnings. Its 1Q12 net profits of S$88m (+28% y-o-y, -5% q-o-q) beat market expectations of S$80m. This was due to lower handset subsidy and traffic costs. The handset subsidy cost for each smartphone

was lower due to a higher adoption of Android phones which comprise 50% of new smartphone sales versus 25% a year earlier. Traffic costs also declined as StarHub, as a Vodafone partner, had managed to negotiate lower interconnect rates for some destinations.

Management sees cost pressures in upcoming quarters. Management has maintained its FY12F service EBITDA margins guidance of 30% despite having achieved 32% margins in 1Q12. The recent launch of the Galaxy S3 phone could raise the subsidy bill for telcos. The upcoming iPhone 5 launch is another cost factor (launch rumored in Oct 2012) to consider. StarHub will also incur the cost of exclusive UEFA Cup rights in 2Q12. It will be paying an undisclosed cross-carriage fee to SingTel for carrying Euro Cup matches on SingTel’s pay TV platform.

Our View

Raise FY12F earnings by 5% on higher margins. We project service EBITDA margins of 30.6% in FY12 compared to 29.7% earlier. We do not expect capital management in the near term, as the company may want to preserve cash for the spectrum auction for 1800 MHz and 2600 MHz bands, possibly in 2013.

Recommendation

Maintain HOLD. Our DCF-based (WACC 7.6%, terminal growth 0%) TP has been raised to S$3.10 as we had rolled forward the valuation to FY13F. Currently the stock is trading with a 6.3% yield, with minimal growth prospects. Its quarterly 5 Scts DPS is the key attraction; however that seems to have been priced in, with a FY12F PE of 17x versus the historical average PE of 14x.

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