2Q10 preview: Focus on pay TV outlook post-EPL

STH reports 2Q10 results on Thurs 5 Aug 2010.

We forecast total 2Q10 revenues at S$547m, down 2% QoQ as declines in equipment, cable TV and broadband revenues are partially offset by growth in mobile and fixed. Service revenues are projected to be approx S$522m (down QoQ but up 2% YoY). Margins should recover on 1Q10 but will still be down YoY on higher subsidies and we therefore expect STH’s 2Q10 EBITDA margin to be around 26.5% on all revenues and 27.8% on service revenues (versus 2Q09’s 30.3% and 31.4% respectively). Total EBITDA is projected to reach S$145m (down 10% YoY) with NPAT down 17% YoY to S$65m.

Key focus on pay TV performance and cash-flows

We expect STH’s financial performance will improve QoQ throughout 2010e after the weak 1Q10. This improvement is despite our expectations that both cable TV and broadband revenues will be impacted by the English Premier League (EPL) loss. Specifically, we expect pay TV ARPU declines while we also project a 40k net pay TV subscriber loss by end-2010. As a result, we forecast 2010e pay TV and broadband revenues to be down 10% and 8% YoY respectively. So clearly a key focus at the 2Q10 results will be on how STH’s pay TV business has performed over recent months, especially in terms of subscriber churn – if not as severe as we expect then there may be upside risk to our estimates. Elsewhere, we will be watching free cash-flow trends given 1Q10’s good cash-flow generation on more active working capital management.

STH is up 9% year-to-date (STI up 1.7% YTD) and it remains our preferred Singapore telco especially as we continue to believe that the 20c/share annual dividend per share and the associated 8.5% dividend yield is long-term sustainable. Our S$2.62 target price implies a target 7.6% yield and we maintain Buy particularly as we expect 2Q10 results to show QoQ improvement.

2Q10 preview: Focus on pay TV outlook post-EPL

STH reports 2Q10 results on Thurs 5 Aug 2010.

We forecast total 2Q10 revenues at S$547m, down 2% QoQ as declines in equipment, cable TV and broadband revenues are partially offset by growth in mobile and fixed. Service revenues are projected to be approx S$522m (down QoQ but up 2% YoY). Margins should recover on 1Q10 but will still be down YoY on higher subsidies and we therefore expect STH’s 2Q10 EBITDA margin to be around 26.5% on all revenues and 27.8% on service revenues (versus 2Q09’s 30.3% and 31.4% respectively). Total EBITDA is projected to reach S$145m (down 10% YoY) with NPAT down 17% YoY to S$65m.

Key focus on pay TV performance and cash-flows

We expect STH’s financial performance will improve QoQ throughout 2010e after the weak 1Q10. This improvement is despite our expectations that both cable TV and broadband revenues will be impacted by the English Premier League (EPL) loss. Specifically, we expect pay TV ARPU declines while we also project a 40k net pay TV subscriber loss by end-2010. As a result, we forecast 2010e pay TV and broadband revenues to be down 10% and 8% YoY respectively. So clearly a key focus at the 2Q10 results will be on how STH’s pay TV business has performed over recent months, especially in terms of subscriber churn – if not as severe as we expect then there may be upside risk to our estimates. Elsewhere, we will be watching free cash-flow trends given 1Q10’s good cash-flow generation on more active working capital management.

STH is up 9% year-to-date (STI up 1.7% YTD) and it remains our preferred Singapore telco especially as we continue to believe that the 20c/share annual dividend per share and the associated 8.5% dividend yield is long-term sustainable. Our S$2.62 target price implies a target 7.6% yield and we maintain Buy particularly as we expect 2Q10 results to show QoQ improvement.

Attractive Dividend Yield

Ex-CEO paring stake. StarHub Ltd saw a spate of insider selling of shares from former CEO Terry Clontz over the last two weeks. As of 29 Jun, Clontz sold another block of 30,000 shares, bringing his total share sale to 1,197,200 shares. We understand that the recent action was in response to the new US Senate Tax Extenders Bill; although currently still in debate, the Bill will effectively raise the tax on capital gains, dividends and ordinary income. As such, it makes sense for most Americans to accelerate their capital gains in 2010. According to management, Clontz indicated to them that while he may choose to accelerate more capital gains this year, he intends to keep a substantial amount of StarHub shares intact for as long as he is a director of the company. Based on the latest announcement, Clontz still owns 5,791,450 shares (or a 0.338% stake). But even with more share sales from Clontz, we do not expect any overhang on the share price because of the context of the sale.

iPhone 4G and iPad hitting Singapore in Jul. Meanwhile, Apple’s newest iPhone 4G is expected to hit Singapore in Jul – media reports suggest that there is a good chance that all three telcos will be offering the hotly sought-after smartphone at the same time. Indeed, StarHub has already started to accept pre-orders for the phone on its website for both consumers and corporate customers. While the pricings for the various models have not been fixed, we expect them to be comparable to the existing iPhone 3GS. With StarHub and M1 being slightly late to the game – they only started offering the iPhone 3GS in mid-Dec 2009 – the demand from their existing iPhone subscribers may not be as strong due to the 2-year lock-in period. As such, we suspect the promotions/subsidies for the iPhone 4G may not be that aggressive. Another eagerly awaited Apple product – the iPad with WiFi and 3G capabilities – could also be hitting our shores in Jul and this could also drive up the take-up of data plans.

Attractive dividend yield. In light of the more volatile markets, spooked by concerns of slowing economies in US and China as well as the ongoing EU sovereign debt crisis, we continue to maintain our preference for defensive plays. We also like StarHub’s attractive dividend yield of 8.7% (StarHub has committed to pay S$0.05 per quarter as dividend). Maintain BUY with S$2.32 fair value.

StarHub takes a short cut to TVB dramas

STARHUB is polishing the crown jewel of its Chinese programming by bringing popular Hong Kong drama series to local screens a month after their home debut.

This perk will be extended to the firm’s cable television customers from June, thanks to a recent change in the licensing policy of Hong Kong television producer TVB.

TVB drama series enjoy a strong local following but previously, StarHub could only gain access to them some three months after their broadcast in Hong Kong. This is because these programmes are first released to the video rental market before being distributed to operators.

However, TVB decided to reduce the timeframe for pay-TV companies as some consumers have been illegally downloading its programmes after their Hong Kong broadcast.

‘This (illegal downloading) is jeopardising our interest so we decided to shorten the window,’ said Sherman Lee, controller of the telecast licensing division at TVB’s international arm TVBI.

TVB content is currently carried on 10 StarHub channels, of which three are so-called video-on-demand (VOD) offerings.

This means that the programmes do not follow a fixed schedule and can instead be called up instantly by the user. The latest TVB drama series will first be carried over these VOD channels.

‘TVB is another important source of content for us aside from the BPL (Barclays Premier League),’ said StarHub’s chief operating officer Tan Tong Hai at a media conference yesterday.

Beyond expediting access to TVB content, some of the programmes will also be offered in high-definition and on StarHub’s mobile and broadband platforms, he added.