StarHub's Q1 net profit up 28% at $88m on mobile growth

STARHUB continued to ride on mobile revenue growth in the first quarter. Its net profit for the three months ended March 31 shot up 28 per cent year on year to $88 million, the firm announced yesterday.

Mobile revenue increased 4 per cent to $307 million, mainly on a higher post-paid subscriber base and increased Arpu (average revenue per user). Earnings per share came to 5.15 cents, up from 4.03 cents a year earlier.

This arm of the triple-play provider's business still makes up the bulk of StarHub's business, at 52 per cent contribution. In Q4, mobile revenue hit $312.2 million, making up 51 per cent of the firm's business

StarHub's mobile customer base is split nearly in half between post and pre-paid bases, with 1.07 million post-paid and 1.13 million pre-paid customers.

Going for the Gold

Expect earnings to rebound in 1Q12. StarHub will report 1QFY12/12 results on 4 May. We expect net profit of SGD85m, up 8% QoQ from an adjusted SGD79m. Given its rather lazy balance sheet currently, we will be on the lookout for indications of a dividend hike in coming quarters, but even without any, the current yield is still attractive at 6.3%. Given its recent outperformance, the stock may pull back before re-rating further, but fundamentally, we maintain our BUY call with a higher target price of SGD3.50, based on the average 5.7% yield of the top 15 dividend stocks over a billion in market cap.

Margins should rebound. For one thing, we do expect margins to bounce back in 1Q12. Similar to M1, margins should recover QoQ. In 4Q11, handset subsidies pushed EBITDA margin to 30.7% (excluding capex writebacks), although the severity was much less than the other telcos. Relieved of this pressure, we expect margin to rebound toward 32% in 1Q12. Nevertheless, our full year forecast assumes a lower 31% margin, reflecting higher cost pressures in 2H12.

Mobile business should continue to outperform. In addition, mobile should grow QoQ despite lower seasonality, for a couple of reasons. One, we believe StarHub has gained market share at the higher end of the market, with its postpaid base now skewed more toward the higherend SmartSurf plans. Two, we expect data revenue to continue to benefit from higher penetration for smartphones and tablets.

Pay TV should also get a price hike kick. Last Aug, StarHub raised its Pay TV basic rate by SGD2, which stemmed the decline in Pay TV revenue that started after the loss of BPL. 1Q12 should continue to reflect this increase. However, margins may be squeezed slightly by operational costs related to cross-carriage ahead of the UEFA Euro 2012 games that will kick off in Jun 2012.

What to look out for. In particular, we would be interested in whether StarHub will utilise its currently under-utilised balance sheet to raise dividend payout this year. In 2006 and 2007, it had made two rounds of capital returns when net debt/EBITDA fell to current levels. Further, it has raised dividends every year except 2010 and 2011. Looking at its forward cashflow and capex needs, we reckon it is in a good position to increase dividends beyond SGD0.20 a share.

Show me the money

Our recent chat with StarHub executives has given us reason to believe that the company is more likely to raise dividends than undertake a one-off capital management exercise. Competition in fixed broadband is likely to stay benign as we expect fibre connections to remain slow.

We tweak our EPS estimates upwards as we now assume it will raise DPS rather than pay out 25 cts in a capital reduction. StarHub remains an Outperform and our top Singapore and regional telco pick. Our DCF-based target price is unchanged.

More cash than it needs

StarHub continued to downplay the possibility of a one-off capital management exercise to optimise its capital structure as it does not sustain the share price. In addition to the uncertain economic conditions which it earlier cited as a reason to be cautious, StarHub is also erring on the side of caution due to regulatory developments such the common-feature set top box. As a result, we now think a higher dividend is more likely than a capital reduction exercise.

NGNBN stuck in the slow lane

Unless the Minister steps in, we understand that there is little the regulator can do to compel OpenNet to step up its service delivery of 2,400 premises per week. This is because OpenNet is already adhering to an agreement with the regulator, which has been revised up from 2,050 in the earlier agreement.

Such a scenario favours StarHub as the adoption of higher-speed broadband is slowed down, which poses less of a challenge to StarHub’s dominance. StarHub’s cable broadband has superior bandwidth over SingTel’s copper-based broadband.

Small step towards monetising data

All three telcos are offering a lower data bundle of 10GB for the latest iPad vs. the previous bundle of 12GB, indicating that they are making baby steps in trying to monetise the surging data traffic.

Raising our DPS estimates

We now assume StarHub will raise its quarterly DPS from 5 cts to 5.5 cts starting 3Q12 and 6 cts from 1Q13 vs. our earlier assumption that it will pay out 25cts in FY12 from a capital reduction. We strongly feel that StarHub will soon have to take steps to optimise its increasingly under-leveraged balance sheet.