Month: May 2008
StarHub – Phillip
Strong results; within expectations
1Q FY08 results. StarHub reported 1Q operating revenue of S$534.9m (+13.2% yoy) and net profit of S$80.1m (+14.5% yoy). Moreover, EBITDA increased to S$167.7m (+6.3% yoy). It also declared an interim dividend of S$0.045 per ordinary share, which was higher than the dividend of S$0.035 last year.
Performances of the various business units. StarHub reported strong growth in its business units: mobile revenue was S$273.2m (+12.7% yoy), cable TV revenue was S$97.2m (+22.7% yoy), broadband revenue was S$64.1m (+6.0% yoy), fixed network service revenue was S$72.7m (+6.7% yoy) and sale of equipment was S$27.8m (+23.7% yoy). As at 31 December 2007, the number of customers for its mobile, Pay TV and broadband businesses were 1,799,000, 508,000 and 352,000 respectively.
FY08 Outlook. StarHub expects continued growth in its operating revenue in 2008 to be approximately 10% and will pay a minimum annual cash dividend of 18.0 cents per ordinary share for 2007. The EBITDA margin is estimated to be about 33% of service revenue and the cash capital expenditure as a ratio of operating revenue will not exceed 12%.
It has introduced new services to meet the demands of its customers. For example, it has launched a new flat rate data roaming service to give customers a simplified rate structure and better control on costs while roaming outside Singapore. Moreover, in the Pay TV business, it continues to add more content and variety to its TV programmes to appeal to more audience. Furthermore, it has teamed up with City Telecom (HK) Limited and M1 to jointly submit a bid for the Next Generation National Broadband Network (NGNBN) project.
HOLD recommendation, target price maintained at S$3.30. StarHub is attractive as a dividend play although its operations are focused on the Singapore market. Due to limited upside in the share price, we are maintaining our hold recommendation on the stock and fair value at S$3.30.
StarHub – OCBC
1Q08 results mostly in line
1Q08 results within expectations. StarHub Ltd posted a relatively good set of 1Q08 results, with revenue up 13.2% YoY (down 0.7% QoQ) to S$534.9m, meeting about 24.2% of our FY08 estimate, while net profit rose 14.4% YoY (down 18.6% QoQ) to S$80.1m, or around 23.9% of our FY08 number. EBITDA posted a 6.3% YoY (+6.5% QoQ) rise to S$167.7m, but margin eased from 35.0% in 1Q07 to 33.1%. Dow Jones poll was expecting StarHub to post earnings of S$84.7m on revenue of S$534.0m. StarHub also declared a quarterly tax-exempt dividend of S$0.045, up from S$0.035 a year ago, in line with its guidance of at least S$0.18 payout this year.
Cable TV was star performer. Cable TV operations showed the best improvement, up 22.7% YoY and 2.3% QoQ, to contribute 18.2% of revenue (versus 16.8% in 1Q07, 17.6% in 4Q07), aided by a continued rise in ARPU from S$55 to S$57/subscriber as well as the addition of 4k new customers. Cable broadband saw a modest 6.1% YoY (+2.7% QoQ) rise in sales, despite 6k rise in subscribers; ARPU also eased from S$60 to S$59/user as more customers subscribed for its new low-price plan service. Cable EBITDA edged down from 27.4% in 1Q07 to 25.9%, dented by the higher cost of new content and customer retention.
Competition heats up in mobile segment. Mobile business saw sales rise 12.7% YoY (down 0.9% QoQ), still contributing about 51.1% of total revenue. StarHub added about 43k new subscribers, with the bulk again coming from the pre-paid segment, but the 31k new adds only brought on a 2% increase in revenue. On the other hand, the 12k new post-paid adds led to a 16% revenue rise. But mobile EBITDA fell sharply from 43.1% in 1Q07 to 36.6%, after average acquisition cost jumped 27.8% QoQ to S$124/ user, the highest since 1Q05, as StarHub moved to aggressively defend its market share ahead of the implementation of true mobile number portability (MNP) in June 2008.
Watching EBITDA margin most closely. Management is keeping to its guidance (10% revenue growth, 33% EBITDA margin, S$0.18 dividend) for this year, but EBITDA margin could come under pressure from the intense mobile competition. Nevertheless, we are keeping our FY08 estimates unchanged and our fair value remains at S$3.51. Coupled with the decent 6% dividend yield, we maintain our BUY rating.
StarHub – BT
Higher operating profit, tax adjustment boost StarHub Q1 performance
STARHUB emerged from a more competitive first quarter with net earnings 15 per cent higher at $80 million, helped by better operating profit and a one-time tax adjustment.
‘If the one-time net tax adjustment had been excluded in Q107, the Q108 profits after tax would show a 4 per cent increase year-on-year,’ said StarHub.
Diluted earnings per share was up 25 per cent at 4.67 cents and it proposed an interim dividend of 4.5 cents per share, up from 3.5 cents a year ago.
Singapore’s second largest telco said operating revenue increased 13 per cent to $535 million although margins fell as it paid more to retain and acquire customers. Operating profit rose 5 per cent to $108 million.
The group’s earnings before interest, tax, depreciation and amortisation grew 6 per cent to $168 million but margin was 33.1 per cent, down 2 points from 35 per cent. ‘Competitive intensity has heated up quite a bit,’ said Starhub chief executive Terry Clontz. He said that the firm is watching its margins closely. StarHub has guided that margins to be about 33 per cent for the full year.
StarHub said higher programming and content costs amortisation while partially mitigated by increases in subscription prices in the cable TV business continue to impact Ebitda in 2008. Further, the intensified competition in the mobile market has led to higher acquisition and retention costs for both the pre-paid and post-paid segments in Q1 2008, which further impacted the Ebitda margin.
Singapore telcos have intensified their marketing campaigns ahead of the introduction of true number mobile portability next month, when consumers will be able to switch operators effortlessly while keeping their phone numbers.
So while StarHub managed to increase mobile customers by 42,600 during the quarter to 1.8 million, its market share fell to 30.4 per cent from 31.3 per cent.
Mobile revenue grew 13 per cent to $273 million while pay TV sales jumped 23 per cent to $97 million. Broadband revenue rose 6 per cent to $64 million and fixed network sales 7 per cent to $73 million.
Free cash flow fell 78 per cent to $31 million from $140.7 million due to higher capital expenditure payments, higher prepayments, reduced trade payables and accruals in the quarter. Capital expenditure was $35 million higher at $59 million. The rise included $28 million of capex payments for projects carried over from December 2007 and paid in the beginning of this year.
CEO Kwek Buck Chye said that he expects the free cash flow to increase to over $100 million in the current quarter. StarHub expects 2008 cash capex not to exceed 12 per cent of operating revenue.
SingTel – BT
Bharti’s move seen as risky
Concerns include its funding for deal that could top US$20b if bidding war erupts
Bharti Airtel’s mooted African expansion will look to franchise a model that has made it the leader in the world’s fastest-growing mobile market, and diversify its exposure from an increasingly tough Indian market.
But analysts also see risks in buying into South Africa’s MTN Group – potentially India’s biggest foreign acquisition – with a lack of clarity over Bharti chairman Sunil Mittal’s plans adding to the uncertainty.
Concerns include: How would Bharti fund a deal that could top US$20 billion if a bidding war broke out; how would it integrate a similar-sized company and deal with regulators and customers in 21 countries; and will it be distracted from its home market just as significant changes are underway?
‘MTN is not a small company, and it’s not a cheap acquisition,’ said Rishi Sahay, director of IndusView Advisors.
‘The synergies are difficult to value as they’re different networks, different geographies, and they’re nearly the same size. So you may have to run it like two independent companies, and Mittal doesn’t have much international experience.’
Bharti Airtel, valued at around US$40 billion and more than one third-owned by Singapore Telecommunications Ltd and investment company Temasek Holdings, says it is in exploratory talks with MTN, but has not submitted an offer.
The Financial Times has reported Bharti has bid 165 rand per MTN share for a 51 per cent stake, valuing MTN at about US$37 billion, and has secured US$12 billion in financing.
‘It is more expensive to raise money today than it was a year ago, but maybe because M&A is cooling off elsewhere, it’s a good time for Indian companies to look at opportunities,’ said S Subramanian, head of investment banking at Enam Securities.
India’s wireless market, the world’s biggest after China in user numbers, grew 25-fold between 2002-07, ringing up record profits for telecom firms and attracting global players such as Vodafone, which last year bought a controlling stake in India’s third-largest mobile operator for US$11 billion. Local rival Reliance Communications Ltd is also expanding.
That stellar growth is expected to slow as the percentage of the population with a mobile phone tops 40 per cent by 2010 from 22 per cent now. As the telcos have to seek users in poorer rural areas to increase customer numbers, average revenue per user is likely to fall.
‘There has to be a natural limit to all this, because after a certain point of time, everybody who you think needs and can afford a phone, will have one,’ said Mahesh Uppal, director at telecoms consulting firm Com First.
‘We will have half a billion users by 2010, and after that I suspect the growth has to slow, because you are talking about really marginal users who will come into play.’
Competition is also getting tougher in India. The government recently awarded 120 new telecom licences and wants to allow users to retain their mobile number if they switch operators.
‘A few years down the line, growth opportunities in the Indian market could dry up and, therefore, the telecom companies will have to look overseas for expansion,’ said Yogesh Kirve, sector analyst with Anand Rathi Financial Services. ‘If you go for organic growth overseas, it will be very time consuming.’
If Bharti bought into MTN, which operates in Africa and the Middle East, the combined entity would today have 130 million subscribers, giving it significant leverage with equipment suppliers and handset vendors, UBS analysts said.
MTN had 68.2 million subscribers as of March, compared with Bharti’s 62 million. The South African firm’s annual revenue is US$9.6 billion, against Bharti’s US$6.7 billion, according to Citigroup.
‘We see little by way of synergy benefits,’ said Kawaljeet Saluja and Rohit Chordia, analysts at Kotak Securities.
‘More importantly, growth rates of MTN would be significantly lower than Bharti,’ they said, adding consensus forecasts point to 16.7 per cent annual growth in MTN’s operating profit over three years, compared with a compound annual growth rate of 31.7 per cent for Bharti over the same period.
One Mumbai-based analyst said that could be an opportunity Bharti was looking to exploit, leveraging on its success in India’s emerging market.
‘Bharti is one of the pioneers in bringing down tariffs sharply … yet maintaining strong margins,’ said the analyst, who asked not to be named because of company policy. ‘Once Bharti uses its own efficiency in MTN, the South African firm’s numbers will look much, much better.’
Exporting a business culture to another firm is easier said than done. IndusView’s Sahay said there were not many examples of successful mega telecom deals.
‘Look at Sprint, Nextel,’ he said. ‘However, if Mittal wants to play in the big league, he has to do a big deal. Telecom is so regulated, there aren’t many opportunities. So you don’t know when and where the next one will be.’ – Reuters
StarHub – DBS
Deteriorating market share and margins
Story: Excluding one-time tax adjustments in 1Q07, net profit grew 4% y-o-y but was 5% below our and consensus forecasts primarily due to lower margins. EBITDA margins dropped to 33.1% from 35.0% in 1Q07. As expected, StarHub declared an interim dividend of 4.5 cents per share.
Point: The lower margins in the cable TV business were in line, but the drastic drop in mobile margins was unexpected. In the pre-paid mobile space, ARPU tumbled due to an aggressive SingTel. Post-paid mobile ARPU was firm, but significantly higher equipment subsidies eroded margins. StarHub lost its mobile market share for the fourth consecutive quarter, which dropped by another 90 basis points to 30.4% sequentially.
Relevance: Ahead of full mobile number portability (MNP), we do not expect competition to ease. We maintain our earnings estimates for FY08 and FY09, which are 3.5% and 5% below the street estimates respectively. Maintain HOLD with our DCF based (WACC 6.2%, terminal growth rate 0%) target price of S$3.10.
Can management meet its guidance for 2008?
Management again guided for 10% revenue growth and 33% EBITDA margin in 2008. We believe revenue growth guidance is fair despite a healthy 13% revenue growth in 1Q08. About 50% of this revenue growth came from the mobile business, which should be flat in 2H08 y-o-y because of high post-paid ARPU base of S$78-79 in 2H07. Indeed, we are afraid that ARPU could fall if roaming revenue drop due to an economic slowdown. On the other hand, we believe there is downside risk to margin guidance (currently 33%) as 4Q margins are typically significantly lower than the rest of the year due to traditional promotions. This pulls down margins for the whole year, as in 2007.