StarHub – DBSV
Counter-intuitive cost savings
- 3Q12 earnings of S$96m (+27% yoy,+11% qoq) were 15% ahead of our estimates.
- Surprise came from lower traffic and handset subsidy costs.
- Lost mobile market share & pay TV subscribers
- Recommendation and TP under review pending more information from the company.
Counter-intuitive cost savings. We are surprised by the S$10m sequential decline in traffic costs despite rising data traffic, which management attributed to successful negotiations with international carriers. Cost of equipment was almost stable despite launch of expensive Samsung Galaxy S3 in late May and iPhone 5 in late August, which needed higher subsidies. StarHub could have discouraged these expensive handsets, which possibly reflected in the lower postpaid revenue (-1.2% YoY) as well.
Unimpressive operating metrics in mobile & pay TV. Mobile market share shrank to 27.5% from 27.7% in 2Q12 and 28.5% in 3Q11 due to loss of 10.5K prepaid subscribers in 3Q12. This can perhaps be explained by low marketing expenses (-12% YoY). StarHub lost 1.6K pay TV subscribers due to aggressive offerings from SingTel’s mio TV.
FY12F/13F earnings are likely to be reviewed. Management has guided for lower margins due to festive promotions in 4Q12F. Potentially slower domestic GDP growth in FY13F may impact mobile roaming revenue while pay TV will continue to face intense competition from SingTel.
Recommendation and TP under review. Despite net debt to EBITDA of only 0.5x versus long term target of 1.5x-2.0x, there is no clear assurance about dividend-hike in 2013F due to: (i) spectrum auction in 2013; (ii) potentially higher capex for 4G & enterprise business in 2013. In our DDM model, we assume 8% cost of equity, 2% long-term growth rate and project 22 Scts DPS (versus 20 Scts in FY12F) in FY13F.