StarHub – CIMB

Still shining in 2Q

1H12 earnings were 4% and 9% above CIMB's and consensus estimates, respectively, due to margin surprise and we consider it in line as we expect margins to moderate in 2H due to higher handset subsidies and competition. StarHub maintained its outlook for FY12.

But it nudged its capex up as it is accelerating its LTE rollout. Maintain DCF-based target price (WACC 7.9%/LTG 1.4%) and Outperform call given its higher dividend potential as its net debt/EBITDA of 0.5x is its lowest since 2Q06. Hence, StarHub remains our top Singapore telco pick.

2Q earnings highlights

StarHub's operational performance was robust with service revenue rising 2% qoq and 4% yoy and EBITDA margin gaining 1.5% pts yoy and 0.4% pts qoq. This is mainly due to a 1.3% qoq decline in operational costs, thanks to lower marketing expenses and cost of handsets.

However, a few red flags:

1) 2Q prepaid revenue fell 2% qoq and 5% yoy due to lower ARPUs and fewer subscribers as users switched out after promotions expired,

2) the number of pay TV subscribers fell 0.2% qoq and yoy as customers churned out after short-term promotions expired, and

3) broadband user numbers also dipped 0.2% qoq as they left for cheaper offerings by new entrants riding on NGNBN.

Margin pressure in 2H

StarHub maintained its EBITDA margin guidance of 30% despite 1H's coming in at 32% because it expects margins to come under pressure when the new iPhone is launched in 4Q. It expects the device to be very popular given the widely-anticipated radical upgrades and new features.

Maintain outlook, nudging up capex

Starhub maintained its FY12 outlook and kept its 20 Scts DPS. We are still optimistic about its dividend upside potential as net debt/EBITDA is at its lowest since 2Q06. However, it has revised up its capex guidance from "below 11%" of revenue to "about 11%". It plans to accelerate its LTE rollout in 2H12, ahead of the release of new LTE handsets.

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