Let’s look beyond the immediate

Event

• Looking beyond StarHub’s 2Q CY10 results, which disappointed on margins, we expect margins to improve in 2H CY10 and earnings growth to return strongly in CY11. We believe investors need to focus on the various changes that are in the offing in 2H CY10 (upside on corporate data from NGNBN, higher postpaid ARPU from smartphone data usage and lower-than-expected TV subs loss). StarHub remains a high dividend play (8.5% dividend yield), and we maintain our Outperform rating, while trimming our target price to S$2.62 from S$2.64.

Impact

• Immediate concerns being addressed: After 2Q results, investors may be wary about a margin decline and potential Pay TV subscriber loss to Mio.

Concern 1: Margins – EBITDA margin decline to 23.0% from 31.1% in 1H CY10 affected by one-offs like higher production costs from World Cup and a S$12m staff bonus. We expect margins to recover in 2H CY10 to about 27.5% and to remain around that level in CY11.

Concern 2: Pay TV subs loss – Despite the loss of BPL rights to SingTel, the subscriber base remains at 541,000. Although we assume a 7% decline, we think StarHub can retain subs by offering new channels.

Concern 3: Sustainability of dividends – Management remains committed to a S¢5 dividend per quarter, sustained via FCF. We expect StarHub to sustain around S¢19 dividend payouts in CY11 and CY12.

• Need to focus on the broader changes and the impact: We believe broader changes like impact from NGNBN and smartphones need attention.

Change 1: NGNBN – Potentially launching by October 2010, it provides strong upside for StarHub on the corporate data front, with much larger access to corporates and SMEs (24,000 buildings vs only 800 now).

Change 2: High smartphone usage – Increasing smartphone penetration driven by new Android-based phones and iPhone 4 could increase data usage in long term, positively affecting postpaid ARPUs.

Change 3: Pay TV – Despite the BPL rights loss to SingTel, StarHub remains the leader in Pay TV, with more channel offerings (locked in for three years), attractive packages and constantly improving telecast quality.

Earnings and target price revision

• Sequentially, we cut our EPS estimates for the next two years by 16% and 5%, respectively. We trim our TP to S$2.62 from S$2.64.

Price catalyst

• 12-month price target: S$2.62 based on a DDM methodology.

• Catalyst: Margin recovery in 2H CY10 and NGNBN launch.

Action and recommendation

• We expect positive news flow in terms of margins, upside from the NGNBN launch and continuity of high dividend payouts to keep the stock firm despite weak quarterly results. Maintain Outperform with S$2.62 price target.

Let’s look beyond the immediate

Event

• Looking beyond StarHub’s 2Q CY10 results, which disappointed on margins, we expect margins to improve in 2H CY10 and earnings growth to return strongly in CY11. We believe investors need to focus on the various changes that are in the offing in 2H CY10 (upside on corporate data from NGNBN, higher postpaid ARPU from smartphone data usage and lower-than-expected TV subs loss). StarHub remains a high dividend play (8.5% dividend yield), and we maintain our Outperform rating, while trimming our target price to S$2.62 from S$2.64.

Impact

• Immediate concerns being addressed: After 2Q results, investors may be wary about a margin decline and potential Pay TV subscriber loss to Mio.

Concern 1: Margins – EBITDA margin decline to 23.0% from 31.1% in 1H CY10 affected by one-offs like higher production costs from World Cup and a S$12m staff bonus. We expect margins to recover in 2H CY10 to about 27.5% and to remain around that level in CY11.

Concern 2: Pay TV subs loss – Despite the loss of BPL rights to SingTel, the subscriber base remains at 541,000. Although we assume a 7% decline, we think StarHub can retain subs by offering new channels.

Concern 3: Sustainability of dividends – Management remains committed to a S¢5 dividend per quarter, sustained via FCF. We expect StarHub to sustain around S¢19 dividend payouts in CY11 and CY12.

• Need to focus on the broader changes and the impact: We believe broader changes like impact from NGNBN and smartphones need attention.

Change 1: NGNBN – Potentially launching by October 2010, it provides strong upside for StarHub on the corporate data front, with much larger access to corporates and SMEs (24,000 buildings vs only 800 now).

Change 2: High smartphone usage – Increasing smartphone penetration driven by new Android-based phones and iPhone 4 could increase data usage in long term, positively affecting postpaid ARPUs.

Change 3: Pay TV – Despite the BPL rights loss to SingTel, StarHub remains the leader in Pay TV, with more channel offerings (locked in for three years), attractive packages and constantly improving telecast quality.

Earnings and target price revision

• Sequentially, we cut our EPS estimates for the next two years by 16% and 5%, respectively. We trim our TP to S$2.62 from S$2.64.

Price catalyst

• 12-month price target: S$2.62 based on a DDM methodology.

• Catalyst: Margin recovery in 2H CY10 and NGNBN launch.

Action and recommendation

• We expect positive news flow in terms of margins, upside from the NGNBN launch and continuity of high dividend payouts to keep the stock firm despite weak quarterly results. Maintain Outperform with S$2.62 price target.

2Q10 missed but focus on the sustainable dividends

2Q10 missed DBe but maintain Buy for the sustainable yield

STH reported S$58m 2Q10 NPAT (-25% YoY), below Consensus and DBe’s S$65m, as EBITDA margin recovered slower than we expected. But revenues grew 7% YoY to a new high of S$569m and were slightly ahead of DBe (S$547m) and we believe STH’s margins and overall performance will continue to improve into 2H10e. Importantly, the 6.4c/share FCF was robust (128% of the 5c/share 2Q10 dividend) and continues to underpin STH’s long-term dividend sustainability – a key reason we still like STH and maintain Buy.

2Q10 revenues at a new high and 1H10 revenues trending in-line

2Q10 total revenues +7% YoY to S$569m and were slightly ahead of our expectations (S$547m) on strong mobile and cable TV revenue growth. Specifically, mobile revenues jumped 8% YoY to S$294m on increased IDD & roaming and data usage while 2Q10 cable TV revenues were boosted by the FIFA World Cup 2010 broadcast and rose strongly 9% YoY (excluding this, 2Q10 cable TV revenues would have been stable YoY). Elsewhere, 2Q10 fixed revenues +2% YoY, handset revenues +26% YoY (continued robust smartphone take-up) while broadband revenues fell 2% YoY (ARPU decline on subscriber dilution). Overall, 1H10 revenues reached S$1,127m and represented 51% of DB10e (S$2,195m).

But 2Q10 EBITDA margin recovered slower than expected

2Q10 opex rose 16% YoY to S$429m as increased smartphone take-up drove cost of equipment sold up 65% YoY while 2Q10 cost of services grew 21% YoY on higher costs related to the World Cup 2010 broadcast. As such, despite sequential margin improvement, the 2Q10 EBITDA margin was 5.5% pts lower YoY at 24.8% and below our expectations (26.5%) while 2Q10 EBITDA missed our estimate slightly (by 3%) and was down 12% YoY to S$141m. But management continues to expect sequential margin improvement over the course of 2010e and the previous EBITDA margin guidance (28% on service revenues) was maintained.

DCF-derived S$2.62 TP; key risks include content costs and competition

Our valuation is based on DCF using 7.2% WACC (2.8% risk free rate, 4.7% equity risk premium and 5% cost of debt) and 0% g to reflect the long-term growth potential of the Singapore telco market. Our TP implies a 7.6% yield. Key risks include content costs and competition.

2Q FY10: largely in line; earnings visibility remains poor

● StarHub’s 2Q FY10 operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn) while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively).

● Looking ahead, management maintained its full-year revenue growth guidance at low single digit and EBITDA margin at 28%. The company also maintained its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividend is sustainable. Taking the view that margins in 2H would improve, we fine tune our FY11/12E EPS by 1%.

● We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.

2Q results largely in line with our expectations

StarHub reported 2Q10 results on 5 August. Its operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn)

while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively). The 7% YoY growth in overall revenue was driven by a 10% rise in post-paid mobile revenue and a 9% rise in pay-TV revenue. The former was due to the growth in its post-paid subscriber base to 994,000 (from 910,000 in 2Q FY09). However, with COGS surging 26% YoY to S$251 mn, 2Q EBITDA fell 12% YoY (to S$141 mn) and 2Q net profit contracted 25% (to S$58 mn). In addition to a 65% YoY jump in cost of equipment (to S$81 mn), cost of services rose 21% YoY, as a result of higher pay-TV content costs during the period.

Higher mobile data usage offsets lower voice usage

While non-voice usage expanded further (to 34.6% of post-paid ARPU from 30.5% a year ago), voice minutes continued to fall (-12% YoY). As such, ARPU improved just 1% to S$70 (from S$69 during the same period last year). This supports our view that growth in data usage should help offset the decline in voice ARPU, rather than boost overall mobile ARPU. As highlighted in our Asia telecoms sector report, Smartphones – a welcome revenue boost, published on 2 February 2010, we expect overall Singapore mobile revenue to achieve a CAGR of 2% between 2009 and 2015. The corresponding growth rates for voice and data revenue are -4% and 19%, respectively. Driven by higher smartphone sales, acquisition costs per sub rose 38% YoY to S$109 (but fell 11% from S$122 in 1Q10). StarHub added 28,000 post-paid (1Q: 27,000) and 53,000 pre-paid (1Q: 30,000) subs during the quarter.

Looking ahead, management maintained full-year revenue growth guidance at low single digit (in view of the potential impact from the loss of Barclay’s Premier League broadcasting rights on pay-TV subs and the launch of the New Generation National Broadband Network in 3Q10) and EBITDA margin at 28% (versus 30% in 2009). StarHub is also maintaining its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividends is sustainable. StarHub’s 1H revenue and EBITDA accounted for 51% and 45% of our full-year forecasts, respectively. Taking the view that margins in 2H would improve, we marginally fine tune our full-year forecasts.

Maintain UNDERPERFORM

We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.

2Q FY10: largely in line; earnings visibility remains poor

● StarHub’s 2Q FY10 operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn) while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively).

● Looking ahead, management maintained its full-year revenue growth guidance at low single digit and EBITDA margin at 28%. The company also maintained its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividend is sustainable. Taking the view that margins in 2H would improve, we fine tune our FY11/12E EPS by 1%.

● We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.

2Q results largely in line with our expectations

StarHub reported 2Q10 results on 5 August. Its operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn)

while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively). The 7% YoY growth in overall revenue was driven by a 10% rise in post-paid mobile revenue and a 9% rise in pay-TV revenue. The former was due to the growth in its post-paid subscriber base to 994,000 (from 910,000 in 2Q FY09). However, with COGS surging 26% YoY to S$251 mn, 2Q EBITDA fell 12% YoY (to S$141 mn) and 2Q net profit contracted 25% (to S$58 mn). In addition to a 65% YoY jump in cost of equipment (to S$81 mn), cost of services rose 21% YoY, as a result of higher pay-TV content costs during the period.

Higher mobile data usage offsets lower voice usage

While non-voice usage expanded further (to 34.6% of post-paid ARPU from 30.5% a year ago), voice minutes continued to fall (-12% YoY). As such, ARPU improved just 1% to S$70 (from S$69 during the same period last year). This supports our view that growth in data usage should help offset the decline in voice ARPU, rather than boost overall mobile ARPU. As highlighted in our Asia telecoms sector report, Smartphones – a welcome revenue boost, published on 2 February 2010, we expect overall Singapore mobile revenue to achieve a CAGR of 2% between 2009 and 2015. The corresponding growth rates for voice and data revenue are -4% and 19%, respectively. Driven by higher smartphone sales, acquisition costs per sub rose 38% YoY to S$109 (but fell 11% from S$122 in 1Q10). StarHub added 28,000 post-paid (1Q: 27,000) and 53,000 pre-paid (1Q: 30,000) subs during the quarter.

Looking ahead, management maintained full-year revenue growth guidance at low single digit (in view of the potential impact from the loss of Barclay’s Premier League broadcasting rights on pay-TV subs and the launch of the New Generation National Broadband Network in 3Q10) and EBITDA margin at 28% (versus 30% in 2009). StarHub is also maintaining its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividends is sustainable. StarHub’s 1H revenue and EBITDA accounted for 51% and 45% of our full-year forecasts, respectively. Taking the view that margins in 2H would improve, we marginally fine tune our full-year forecasts.

Maintain UNDERPERFORM

We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.