Eyes 10% revenue growth in FY08

Good 4Q07 results. StarHub Ltd posted a good set of 4Q07 results, with revenue up 13.9% YoY and 5.0% QoQ to S$538.8m, aided by good performance from all its business units. Although net profit fell 30.5% YoY (+21.0% QoQ) to S$98.4m, we note that the year-ago quarter was boosted by S$57.6m tax credit versus S$6.7m in 4Q07 (none in 3Q07). It was also ahead of our forecast of S$81.4m and the consensus of S$81.9m. Looking at the pre-tax level, earnings were actually up 9.4% YoY, although it was down 9.2% QoQ. However, we are not surprised by the sequential drop as StarHub typically incurs higher acquisition cost (S$97/connection versus S$92 in 3Q07) in the last quarter. As a result, EBITDA margin also slipped from 33.7% in 3Q07 to 31.2%.

For the full year, revenue grew by a decent 11.6% to S$2,014m, though shy of our S$2,100m estimate, net profit of S$330.4m (down 8.3%) was about 5.4% higher than our estimate. StarHub also declared a final dividend of S$0.045/share (versus S$0.035 in 4Q06), bringing the total dividend for the year to S$0.16 (versus S$0.115 in FY06).

Mobile continues to drive growth. On a segmental basis, its mobile business continues to dominate, contributing around 51.2% of total revenue in 4Q07, up 14.4% YoY and 3.5% QoQ. On the subscriber front, StarHub managed to add some 74,000 new customers, but as the bulk came from the pre-paid segment, EBITDA margin eased to 35% from 40.8% in 3Q07. We note that it was also partly due to the seasonal factor as well as pricier handsets as acquisition cost rose to S$97, up from S$92 in 3Q07. Also worth mentioning, its cable TV business showed a 19.9% YoY and 10.7% QoQ increase to contribute 17.6% of total revenue, aided by a rise in ARPU to S$55, up from S$51 in 3Q07, following an increase in the Sports Group subscription fee in the quarter.

FY08 growth to remain at 10%. For FY08, management remains confident that it can sustain revenue growth at 10%, and hold EBITDA margin on service revenue at about 33%. It also aims to pay a minimum cash dividend of S$0.18/share, or around S$0.045 per quarter. In line with the latest guidance, we have adjusted our FY08 estimates by around 4% higher. Again, we see StarHub as a good defensive stock, backed by an attractive dividend policy, hence we maintain our BUY rating with a revised fair value of S$3.51.

Strong Results; Excellent Dividend Play

4Q and full-year results. StarHub reported 4Q operating revenue of S$538.8m (+13.9% yoy) and net profit of S$98.3m (-30.6% yoy). Moreover, EBITDA increased to S$157.4m (+7.8% yoy). It also declared a final dividend of S$0.045 per ordinary share, which was higher than the final dividend of S$0.035 last year. This brought the total annual dividend to S$0.16 (+39.1% yoy) per ordinary share for 2007 that was significantly higher than the total annual dividend of S$0.115 for 2006.

On a full-year basis, operating revenue of S$2,013.7m was 11.6% better yoy. However, net profit of S$330.3min 2007 was 8.3% lower yoy because it was boosted by a tax credit of S$20.0m while the net profit of S$360.2m in 2006 was due to a higher tax credit of S$77.2m. If the tax credits were excluded, net profit in 2007 would be at S$310.3m, which would be an increase of S$27.3m (+9.6% yoy) from S$283.0m in 2006

Performances of the various business units. StarHub reported strong growth in its business units: mobile revenue was S$1,037.2m (+12.8% yoy), cable TV revenue was S$341.8m (+9.1% yoy), broadband revenue was S$246.9m (+12.3% yoy), fixed network service revenue was S$279.9m (+7.9% yoy) and sale of equipment was S$107.9m (+15.9% yoy). As at 31 December 2007, the number of customers for its mobile, cable TV, broadband businesses were 1,757,000, 504,000 and 346,000 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%.

HOLD recommendation, target price raised from S$3.16 to S$3.30. StarHub has reported better-than-expected financial results. It is also attractive as a dividend play although its operations are focused on the Singapore market. As a result, we are raising the fair value to S$3.30. Nevertheless, we are maintaining our hold recommendation on the stock due to limited upside in the share price.

Results & guidance lag expectations

Story: 4Q07 core net profit of S$71.0m (up10% y-o-y, down 13% q-o-q) was below our and consensus expectations of S$80m. A tax credit of S$27m resulted in net profit of S$98.3m. Besides management declared a final dividend of 4.5 cents bringing total dividend to 16 cents and guided for 4.5cents dividend every quarter.

Point: 4Q07 EBITDA margins were below expectations and FY07 EBITDA margins at 33.7% missed management guidance of around 34%. On outlook, management has guided for EBITDA margins of 33% and revenue growth of 10%. It is the first time that management has guided for lower EBITDA margins.

Relevance: Management guidance is inline with our FY08 earning estimates, which are 5% below the consensus estimates. StarHub trades at over 16x FY08 earnings, which is higher than SingTel’s valuation of 15x, despite StarHub’s lower growth prospects and long term risk from NBN. Maintain HOLD with DCF based (WACC 7%, terminal growth rate 1%) target price of S$3.10 with attractive 6% dividend yield. Although the company has potential for capital management at Net Debt to EBITDA ratio of 1.3x compared to a target of 1.5x-2.0x, management ruled it out in the first half of FY08.

High increase in equipment cost came as a surprise. Operating costs were higher than our expectations mainly due to (1) 71% y-oy increase in cost of sophisticated mobile and set-top boxes, which are getting more expensive and require more subsidies. (2) 71% yo-y increase service cost due to higher cost of content.

Market share loss continues for 3rd consecutive quarter. Mobile market share declined by 200 basis points y-o-y and 60 basis points q-o-q to 31.3%. Similarly for cable TV and broadband segments, despite higher equipment subsidies, subscriber growth has significantly slowed down compared to last year due to market saturation.

StarHub Q4 net profit down 31% at $98m

Revenue rises 14% despite pressure on margins and falling mobile market share

STARHUB yesterday posted net profit of $98 million for the fourth quarter ended Dec 31, down 31 per cent due to tax credit adjustments.

For the full year 2007, net profit was $330 million, down 8 per cent, on a 12 per cent rise in revenue to $2 billion. StarHub tax credits were $20 million and $77 million for 2007 and 2006 respectively.

Despite pressure on margins and falling market share in the all-important mobile phone segment, the second-largest telco in Singapore managed a credible 14 per cent rise in Q4 total revenue to $539 million and saw free cash flow jump 23.4 per cent to $67.2 million. Free cash flow for the full year grew 45 per cent to $483 million.

StarHub decided to reward shareholders with a higher fourth-quarter dividend of 4.5 cents, up from 3.5 cents, bringing the total for the year to 16 cents.

It further delighted shareholders by promising to raise dividend payout for 2008 to a minimum 18 cents.

The confident telco also said it expects full-year operating revenue to grow 10 per cent and capital expenditure to not exceed 12 per cent of operating revenue.

But for the first time, StarHub said it expects Ebitda – earnings before interest, tax, depreciation and amortisation – to decline to 33 per cent for 2008. It was 33.7 per cent in 2007.

Chief executive Terry Clontz said while he expects continued growth, pressures on margin will increase given the fierce competition.

Without naming its bigger rival Singapore Telecommunications, which has increased share of the lucrative mobile phone segment by aggressive marketing, Mr Clontz said ‘it only takes one to disturb the balance’, though he believes that in the long run, rational behaviour should prevail in a mature market such as Singapore.

During the quarter under review, StarHub’s mobile unit was as usual the top performer, with sales up 14 per cent to $275.6 million and 13 per cent to $1 billion for the full year.

Customer base grew 14 per cent to 1.76 million at end-2007 but StarHub’s market share eased to 31.3 per cent from 33.1 per cent a year ago.

Singapore’s mobile penetration has risen to 122.5 per cent fuelled by the rising number of foreign workers and SingTel has the lion’s market share in excess of 41 per cent.

The fight for market share has been intensifying since late last year when Singapore announced that mobile number portability (MNP) will be introduced in June.

StarHub, SingTel and third-place MobileOne have been spending more to retain customers ahead of June and the telcos’ marketing efforts will get more bitter in order to defend their customer bases ahead of the start of MNP.

Mr Clontz said while market share is important, his focus is on increasing shareholder value and cash flow.

He also noted that StarHub still has the highest average revenue per user per month at $26 for pre-paid and $79 for post-paid.

StarHub’s cable TV revenues grew 20 per cent for the quarter to $95 million as it managed to increase subscription prices to customers and sign on more viewers. Despite SingTel’s entrance into the pay-TV space, StarHub has managed to defend its position as the premier provider by cornering the exclusive broadcast rights to all the must-watch sports events, such as bagging this year’s UEFA European Championship football matches.

Customer base rose 4 per cent to 504,000 at end-2007, giving StarHub a household penetration of 45 per cent.