A small glitter

StarHub’s FY11 results were in line, with revenue up 3% while EBITDA rose by a stronger 12.3% y-o-y on good cost management and improved postpaid revenue. The steady core EBITDA margin for 4QFY11 was a pleasant surprise despite a jump in handset cost and given the acute margin pressure at M1 earlier. We tweak our forecast downwards by <1% for FY12/13 following the results and retain our DCF FV of SGD2.80 (WACC: 8.5%, TG: 1.5%). Starhub remains a NEUTRAL as its longer term prospects are clouded by the content carriage ruling, which dilutes its pay-TV franchise, and the competitive headwinds from NGN services.

Broadly in line. Starhub’s FY11 earnings of SGD315.5m appeared to be ahead of consensus and our forecast as 4QFY11 EBITDA surged 11% q-o-q due to the reversal of over-provisioning of staff cost in the earlier quarters. Stripping this out, its earnings were broadly in line. The 4QFY11 revenue growth of 10% q-o-q (+7% q-o-q) reflected the jump in handset sales (+80.3% q-o-q) as the iPhone 4S made its debut last October. Positively, its service revenue grew at the fastest in over 6 quarters, thanks to stronger growth in mobile (+3% y-o-y), pay-TV (+8% y-o-y) and fixed network (+4% y-o-y) revenue, which together contribute 81% of service revenue. We gather that StarHub benefitted from the typically stronger roaming revenue at the year-end, in contrast with M1, which earlier said its roaming revenue was weak and adversely affected by travelers purchasing local starter packs. The other key operational takeaways were: (i) the relatively stable cable broadband segment despite competition from SingTel and the NGN fiber service, and (ii) Starhub’s indication that handset subsidy remains sticky, implying subscriber acquisition cost should remain relatively high in the interim. StarHub did not disclose the number of fiber customers it had but we estimate this to be not too far from M1’s reported 22k.

Better able to monetize data. Starhub said that some 97% of the handsets sold were smartphones, with the take-up among its postpaid and prepaid base at 70% and 30% respectively (implying a smartphone penetration of 50% on its network). We note that StarHub successfully widened its postpaid ARPU over the past few quarters versus a decline at M1, which may reflect that it is better able to monetize data traffic, of which 30-40% is derived from smartphone users. Management acknowledges the shift towards tiered data pricing to further monetize data usage and will continue to monitor the competitive response in the market. On LTE, Starhub expects to roll out its service in 2H2012, with the availability of more devices then to support the launch.

Guidance. Starhub has guided for revenue growth of low single digit for 2012 and its 5 cents/quarter dividend payout, which translates into an attractive 7% yield. It expects capex to not exceed 11% of revenue, including SGD25m carried over from FY11.

No surprises,but watch for capital management

FY11 results are in line, with variances of -2%and +2% to our forecast and market expectations. A 5ct DPS has been declared to a total of 20cts. AS$40m government reimbursement for achieving an NGNBN rollout milestone is expected to lower its gearing further.

Combined with lower capex and higher FCF in FY12, we are further convinced that capital management is ripe. We adjust our forecasts by 1-3% but maintain our DCF target price (WACC 8.3%). StarHub remains an Outperform and our top Singapore telco pick.

Steady ringtone

There are no surprises from the results. Postpaid ARPUs rose on the back of higher data usage as more smartphones were adopted. About 70% of postpaid users now use smartphones, up from 60% a year ago. Prepaid ARPUs declined on the back of voice/SMS cannibalisation by data messaging, even though smartphone penetration was only 30% of prepaid users (Figure 1).

Capex has peaked and StarHub expects capex/revenue to fall to 11% in FY12 from 12% in FY11, despite a S$25m spillover from FY11.

Capital management?

Lower capex and the S$40m reimbursement should cut net debt/EBITDA to 0.5x in FY12 from 0.7x in FY11 (Figure 2), reinforcing our view that the telco could pay out S$0.25/share via capital management in 2H12. Not surprisingly, Starhub downplayed such prospects, blaming the uncertain global and local economy. However, it added that it does review its capital structure quarterly.

Monetising surge in data

StarHub may reprice its data plans. There is consensus among the operators to manage data pricing upwards, consistent with our view that competition is benign. SingTel has already raised rates for its long term evolution (LTE/4G) data plan. M1 will review its pricing later in 2012 when more LTE devices become available.

Strong margins

Strong close to 2011. The feared negative impact on margins from strong iPhone 4S sales did not materialise. Even excluding capexrelated cost provisions, service EBITDA margin was in line with guidance of 30%. StarHub continued to guide for revenue growth and stable margins in 2012, and reiterated its commitment to a stable dividend. Buy with target price of $3.27 based on a 6.5% yield target.

Above expectations. StarHub brought FY11 to a strong close on outstanding performances in almost all segments, especially postpaid mobile. Although full-year net profit of $315.5m included write-backs of capex-related cost provisions, we estimate a net profit of $302m if those write-backs were excluded, in line with consensus. Also, the negative impact feared from iPhone-related subsidies did not materialise as service EBITDA margin was resilient at 30.7% (post-adjustments).

Mobile postpaid outperformed. Postpaid mobile did particularly well as StarHub gained at the high-end. Average revenue per user (ARPU) rose 4% YoY in 4Q11 on the back of an increasing mix of high-end SmartSurf plans. Residential broadband revenue held steady, with netadd of 2,000 customers despite lower ARPU as StarHub drove its hubbing proposition forward. Finally, Pay TV benefited from a commitment fee increase last August.

Margins held up despite strong iPhone 4S sales. Sales of equipment spiked 69% YoY to over 20% of sales on higher iPhone 4S sign-ups. As with M1, StarHub also reported heavy recontracts of the iPhone 4S, launched in end-October, from out-of-contract 3GS users. We expect this to start to normalise in 1Q12 and retreat further in 2Q12. However, margins held up well on lower operating costs. Even after the provision adjustment, EBITDA margin was in line with guidance.

Positive guidance. StarHub’s 2012 guidance of low single-digit growth in revenue and service EBITDA margin of 30% is virtually unchanged from 2011, highlighting management’s confidence despite the slowing economic conditions. In addition to the normal quarterly dividend of $0.05/share declared for 4Q11, management reiterated its commitment to continue its dividend stance, for another $0.20/share in 2012.