A Starry Quarter

Starhub posted a fairly strong quarter as opex fell faster than expected on subdued revenue after it renegotiated interconnect rates. We expect the 4Q12 numbers to be weaker due to the full impact of the iPhone5 and the typical seasonal boost in A&P. We tweak up our forecasts by a marginal 2% for FY12/13 after adjusting our traffic cost assumptions, with FV rising to SGD3.40 from SGD3.30 based on 8.0% WACC. Starhub remains our preferred exposure to the sector for its capital management headroom and robust earnings. An expected 5 cents/share quarterly dividend was declared, in line with the guidance for FY12.

Broadly in line. Although 9MFY12 annualised results were some 6% above our and consensus expectations, we consider Starhub’s numbers in line as we see a weaker Dec quarter on rising subscriber acquisition cost (SAC) and A&P from the full three-month impact of the iPhone5, for which there is strong pent-up demand. The q-o-q and y-o-y dip in mobile revenue was more than offset by falling traffic and content costs post-Euro 2012, which lifted EBITDA margin to 34% in 3Q12 – the highest since 3Q09.

Lower interconnect/outbound revenue. The renegotiation with its partners for lower interconnect rates and weaker roaming revenue led to the slide in postpaid ARPU q-o-q, despite the strong net-adds of 17k. Its prepaid base continued to shrink although management believes this has bottomed. Excluding the interconnect adjustments, mobile revenue would have tracked the 2% growth run-rate seen in 1HFY12.

Data usage poised to accelerate. Despite being able to only monetise about 20% of its base that utilizes over 2GB of data/month, Starhub is confident of capturing stronger revenue going forward with greater LTE adoption and higher data usage on smartphones. According to Starhub, data usage per subscriber has effectively doubled since the iPhone’s introduction in 2009. To stoke LTE demand, Starhub and M1 have extended the promotion periods on their LTE plans to Dec 31 2013 from March 2013.

4Q capex to surge. Starhub will book higher capex from LTE in the final quarter and has maintained its capex/sales guidance of 11% for the full year. This would imply a near doubling of capex q-o-q.

BPL. Starhub did not reveal its intentions in relation to BPL, highlighting that talks between Singtel and FAPL have yet to be concluded. We do not expect Starhub to vie for BPL although Singtel has inked the content on a non-exclusive basis. It expects pay-TV churn to rise going forward with the opening of some of its content, but the availability of content on the OTT (over the top) platform should mitigate churn.

A Starry Quarter

Starhub posted a fairly strong quarter as opex fell faster than expected on subdued revenue after it renegotiated interconnect rates. We expect the 4Q12 numbers to be weaker due to the full impact of the iPhone5 and the typical seasonal boost in A&P. We tweak up our forecasts by a marginal 2% for FY12/13 after adjusting our traffic cost assumptions, with FV rising to SGD3.40 from SGD3.30 based on 8.0% WACC. Starhub remains our preferred exposure to the sector for its capital management headroom and robust earnings. An expected 5 cents/share quarterly dividend was declared, in line with the guidance for FY12.

Broadly in line. Although 9MFY12 annualised results were some 6% above our and consensus expectations, we consider Starhub’s numbers in line as we see a weaker Dec quarter on rising subscriber acquisition cost (SAC) and A&P from the full three-month impact of the iPhone5, for which there is strong pent-up demand. The q-o-q and y-o-y dip in mobile revenue was more than offset by falling traffic and content costs post-Euro 2012, which lifted EBITDA margin to 34% in 3Q12 – the highest since 3Q09.

Lower interconnect/outbound revenue. The renegotiation with its partners for lower interconnect rates and weaker roaming revenue led to the slide in postpaid ARPU q-o-q, despite the strong net-adds of 17k. Its prepaid base continued to shrink although management believes this has bottomed. Excluding the interconnect adjustments, mobile revenue would have tracked the 2% growth run-rate seen in 1HFY12.

Data usage poised to accelerate. Despite being able to only monetise about 20% of its base that utilizes over 2GB of data/month, Starhub is confident of capturing stronger revenue going forward with greater LTE adoption and higher data usage on smartphones. According to Starhub, data usage per subscriber has effectively doubled since the iPhone’s introduction in 2009. To stoke LTE demand, Starhub and M1 have extended the promotion periods on their LTE plans to Dec 31 2013 from March 2013.

4Q capex to surge. Starhub will book higher capex from LTE in the final quarter and has maintained its capex/sales guidance of 11% for the full year. This would imply a near doubling of capex q-o-q.

BPL. Starhub did not reveal its intentions in relation to BPL, highlighting that talks between Singtel and FAPL have yet to be concluded. We do not expect Starhub to vie for BPL although Singtel has inked the content on a non-exclusive basis. It expects pay-TV churn to rise going forward with the opening of some of its content, but the availability of content on the OTT (over the top) platform should mitigate churn.

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.
  

Highlights

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.

Our View

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

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.

Attractive Dividends

Company Overview

Starhub (STH) is the 2nd largest Telecommunications company in Singapore. The company also has a very strong

PayTV franchise with subscriber base of more than 500k.

• 3Q12 beat expectations on lower cost of equipment, and depreciation expenses
  
• Dividends remain attractive, earnings stable
  
• Maintain Neutral with revised TP of S$3.20
  

What is the news?

Starhub posted 3Q12 net income of S$96.2 million, representing growth of 10.8% q-q, 26.9% y-y. This was higher than our expectations, due to lower cost of equipment and depreciation expenses. Starhub maintained

its guidance of low single digit revenue growth, EBITDA margin of 30%, Capital expenditure of 11% of operating revenue, and DPS of 20.0 cents for the year.

How do we view this?

The results were above our expectations. Mobile revenue was below expectations on lower revenue from interconnecting fees for overseas calls. This was a result of renewed negotiations, and was mitigated with lower

interconnecting fees incurred. However, we expect a poorer 4th quarter on higher expenses from promotional activities and higher mobile subsidies, while capital expenditure is expected to increase significantly on LTE and other network enhancements.

Investment Actions?

We adjust our forecast to reflect 3Q12 results, with marginal increases to EBITDA forecast. We continue to be of the view that investors should hold on to shares of Starhub for its attractive dividend yields. Share price remains higher than our revised target price of $3.20 based on our DCF model. We assume WACC of 8.3% and 0% terminal growth rate. We think that the ability to monetize data would be a growth driver and rating upgrade catalyst. However, more visibility on the increase in data usage, and consumer’s receptiveness to paying more for data would be required. We therefore maintain our “Neutral” rating, due to its attractive dividend yields, and stable earnings.