2Q FY2009 results. StarHub reported 2Q FY2009 operating revenue of S$532.4m (+0.2% yoy) and net profit of S$77.8m (+21.1% yoy). Despite the slight increase in revenue, net profit rose by a larger percentage because of lower operating costs and interest expenses. It also declared an interim dividend of S$0.045 per ordinary share, which was unchanged from 2Q FY2008.

Performances of the various business units. Despite the economic downturn as well as competition from SingTel and M1, StarHub reported an increase in the number of customers. As at 30 June 2009, the number of customers for its mobile, Pay TV and broadband businesses were 1,849,000, 530,000 and 389,000 respectively.

StarHub reported mixed performances in its business units. Two business units reported improvements: mobile revenue was S$271.9m (+1.0% yoy) and fixed network service revenue was S$80.0m (+7.3% yoy). Post-paid mobile revenue fell by 1.9% to S$207.6m because customers made fewer domestic and international calls. However, pre-paid mobile revenue rose by 11.5% to S$64.3m due to higher usage from a larger number of customers. Meanwhile, fixed network service revenue increased due to greater take-up of domestic and international leased lines.

Three business units reported worse performances: Pay TV revenue was S$100.5m (-1.5% yoy), broadband revenue was S$60.3m (-3.2% yoy), and sale of equipment revenue was S$19.8m (-14.9% yoy). Pay TV was affected by lower advertising revenue. In addition, broadband revenue decreased as customers opted for subscription discounts. Moreover, consumers were more cautious in their purchases of handsets during the economic slowdown.

Profit margin. Net profit margin decreased from 15.5% in 1Q FY2009 to 14.6% in 2Q FY2009. This was mainly because of higher opearing expenses in 2Q FY2009.

Strong showing against a depressed 2Q08

• StarHub Ltd’s 2Q09 results showed strong growth YoY only because 2Q08 was overall a depressed quarter. Recall that EBITDA margins dipped to 29% in the run-up to June 2008’s launch of Mobile Number Portability. As a result 2Q09 net profit rose 21% YoY to S$77.8mil on EBITDA margins of 31.5%, despite being 6% lower than 1Q09, which enjoyed a 33% margin. For 1H09, net profit rose 11% YoY to S$160mil.

• Second quarter of 2009 reflected a bottoming economy as service revenues rose a marginal 1% YoY and QoQ. Starhub’s growth was attributed to 1% YoY growth in mobile and 13% growth in corporate data and Internet. Mobile was helped by subscriber expansion, while corporate data is still off a low base. Mobile accounts for 53% while fixed services account for 16%, of revenues.

• StarHub added about 11,000 mobile subscribers per month in 2Q09, bringing its total base to 1.85 million, representing 1H09 growth of 3% YoY and 5% HoH. Its prepaid segment added more subscribers but ARPU slipped a small 4% QoQ to S$23. Postpaid however, saw a 3% QoQ pick up to S$69. With increased proliferation of smartphones, non-voice accounted for 30% of postpaid ARPU in 1H09 vs 24% in 1H08.

• The group’s cable TV and broadband revenues slid 2% and 3% YoY, respectively. Momentum maintained at 3,000 net adds for cable TV in 2Q, but ARPU fell 3% QoQ to S$56 as budgetconscious subscribers gave up some premium content. In similar vein, broadband added 6,000 subscribers but saw ARPU falling 7% QoQ to S$51 as more lower-value subscription plans and subscription discounts were taken up.

• Total expenses fell 2.4% YoY in 2Q09 mainly due to lower subscriber acquisition cost, marketing and promotion (as competition returns to a more rational state), as well as reduced staff costs on lower bonuses and benefits from Singapore’s Jobs Credit scheme. These more than offset higher content and traffic costs, and operating lease expense (relocation of its corporate office incurred duplication of rental).

• Content costs stood at 16.6% of service revenues in 2Q09, compared to 15.1% in 2Q08. While rising content costs has been a bugbear for the stock, we think StarHub will be able to manage higher cost content against the renegotiation of existing contracts that are expiring. Bidding for 3-year rights for Barclays Premier League is expected in two-to-three months time. Content accounts for 20% of total expenses in 1H09 and management feels 1H09 reflects the full extent of cost increases.

• On improving sentiments in the macro-environment, we have tweaked our key assumptions on the upside. This leads to a 3% and 2% upgrade in our EPS forecasts for FY09 and FY10, respectively. StarHub’s management has guided for revenues to maintain at FY08 levels, with EBITDA margins at 32%, for FY09.

• Its 2Q09 capex trended upwards to 13.6% of service revenues due to timing issues. However, management continues to hold full-year guidance at 11%. Their estimates also factor in requirements for wholly-owned Nucleus Connect, the OpCo in NGNBN.

• FCF was a strong S$148mil in 2Q09, while net debt to EBITDA improved to 1.1x. StarHub comfortably fulfilled its quarterly DPS of 4.5 cents Singapore and maintains this policy going forward. This puts annual yield at an attractive 8%. n We maintain HOLD rating and Fair Value at $2.28.

Price reflects challenges ahead

• StarHub 2Q09 net profit of S$78m (+21% yoy, -6% qoq) is in line with our expectations.
• We revised our TP to S$2.40 pegged at 13x FY09F PER (12x earlier), at 10% discount to (i) Our SingTel’s revised target PER of 14.5x (ii) Regional average PER of 14.5x.
• The stock has not moved up, underperforming STI by 16% since our downgrade on 27th May. Maintain HOLD in view of limited upside.

StarHub has achieved over 50% of our FY09F forecast. As expected, 2Q09 profit was significanlty better than 2Q08 profit, which was hit by competition due to mobile number portability. Overall, we see no risk to FY09F earnings and 18 Scents DPS estimate for FY09F. Management expressed confidence in securing the English Premier League (EPL) rights, providing there is rational competition from SingTel, in line with our view. The outcome of the bid is in 2-3 months time. Management conceded that EPL right could come at a higher price than the last time, but believed that pay TV margins could be kept stable.

Mobile business showing signs of recovery ahead of other segments. (i) Mobile ARPU showed sequential recovery with higher roaming and data contribution. (ii) Broadband ARPU showed sequential decline due to higher discounts and lower speed plans, in line with our view. (iii) Pay TV ARPU showed sequential decline due to lower take up of premium channels, which could be temporary. (iv) Fixed line business was stable sequentially.

Target price revised to s$2.40 in line with higher valuation for peers. Our SOTP target price of S$3.50 for SingTel, with earnings FY10F-FY12F CAGR of 8%, translates into 14.5x FY10F (Mar year end) PER. Given that StarHub is exgrowth due to challenges ahead in the broadband and pay TV segments, we assign StarHub a PER of 13x at 10% discount to SingTel’s and regional peers average of 14.5x PER.

A mixed bag

• In line. At 49% of ours and 51% of consensus, StarHub’s 1H09 core profit which rose 11% yoy, was broadly in line with ours and market’s expectations respectively. The declaration of a 4.5 cts DPS was as guided.

• Topline was fairly buoyant. Similar to M1, StarHub also posted a sequential growth of 0.3% qoq at the topline. This was led mainly by postpaid revenue (+3.6% qoq), which is 39% of total revenue, driven by higher take-up of data as well as stabilisation in roaming and IDD. Fixed network rose 1.1% qoq as data and Internet along with voice remained stable. On the negative side, broadband revenues dropped -3.4% qoq due to downtrading and discounts while pay TV saw a -1.8% qoq weakness as some subscribers terminated their sports package following the end of the BPL season, higher discounts and lower-take up of premium channels.

• Margins were down. EBITDA margins contracted by 1.3% pts qoq due to content cost escalation (+2.2% qoq) as it has been padding up its offerings with more channels and higher operating lease (+23.9% qoq). This was partially offset by lower staff cost. As a result, cable platform margins were driven down to the lowest since 4Q06. Meanwhile, operating leases were higher because of higher office leases as the group shifted to a new building on top of increased base station rentals to cater for its wireless broadband expansion and international lease capacity.

• Guidance for 2009. StarHub reiterated their 2009 guidance. To recap, StarHub sees stable service revenue, service EBITDA margins of 32%, cash capex of no more than 11% of revenue and a minimum 18 cts DPS for FY09.

• Maintain UNDERPERFORM, earnings forecast, and target price. We make no incisions to our earnings forecast and our DCF-based target price of S$1.58 (WACC: 9.4%, LT growth: 1%). Besides the key event risk of BPL, content costs have been rising where StarHub has little control over this line item in the medium term. StarHub hinted that it may share selected content to reduce cost but at the same time we think would devalue its unique and differentiated content offering of its pay TV business. We maintain UNDERPERFORM on de-rating catalysts of a) content warfare in 3Q, b) margin pressure from higher content cost, and c) further downtrading to broadband or pay TV.