Uninspiring FY14 start

• 1Q NPAT met 22% of FY14 forecast
  
• No change to FY14 outlook
  
• Maintain SELL
  

Uninspiring start to FY14

StarHub Ltd posted 1Q14 revenue of S$571.4m, down 1.5% YoY and 6.9% QoQ, meeting just 23.5% of our full-year forecast; StarHub blamed the drop on lower service revenue (mainly due to intense competition in its Broadband business, where revenue tumbled 13.6% YoY and 4.3% QoQ) and lower equipment sales (down 15.9% YoY and 44.7% QoQ on fewer handsets sold). We also note that mobile revenue saw a muted 1.3% YoY rise (but slipped 1.5% QoQ); and as StarHub declined to break down the mobile revenue into pre-paid and post-paid revenue, we estimate that pre-paid revenue probably slipped as much as 11.7% YoY and -1.7% QoQ, while post-paid rose just 1% YoY but fell 4.9% QoQ. Net profit fell 7.7% YoY (+0.6% QoQ) to S$84.2m, or 22.4% of our FY14 estimate; this as tax increased 15.7% YoY and 21.6% QoQ to S$21.4m, but management expects it to “normalize” over the next few quarters. StarHub declared a quarterly dividend of S$0.05/share as guided.

No change to FY14 guidance

As before, StarHub continues to guide for single-digit growth in service revenue. And despite achieving a service EBITDA margin of 32.6% in 1Q14, management has kept its service EBITDA margin guidance at 32%, possibly due to the still-intense competition in the broadband space; this as it expects to see further pricing pressure to weigh on ARPUs. Management believes that its fixed

network business should still gain more traction, although it did see lower voice revenue in 1Q14. Last but not least, it has kept its capex spending guidance around 13% of total revenue; also kept its annual cash dividend of S$0.20/share, or S$0.05/quarter.

Maintain SELL and S$3.81 FV

For now, we opt to keep our estimates unchanged for now; but we will be looking to trim them if 2Q14 results show no signs of recovering. Our DCF-based fair value also remains unchanged at S$3.81; and with no likelihood of a special dividend this year, we maintain our SELL rating on the stock.

Muted quarter with no surprises

• 1Q14 was rather muted but results were within expectations. Maintain BUY and TP of SGD4.98. Prefer M1.
  
• Service EBITDA margin was above full-year guidance of 32%, which StarHub maintained.
  
• Net debt/EBITDA ratio fell to fresh 0.4x low, pointing to capacity for higher dividends in future.
  

Muted 1Q14 but within expectations

It was a rather muted 1Q for StarHub. QoQ performance was steady with net profit of SGD84m, up 1%. On a YoY basis, lower NBN adoption grants and a higher tax provision led to an 8% drop in net profit. On the positive side, mobile revenue rose 1.3% YoY on better postpaid contributions, fixed network revenue rose 2.2% YoY on stronger corporate business and stabilised international roaming, and EBITDA margin of 32.6% was above full-year guidance of 32%. The negatives were lower broadband and pay TV revenue due to intense competition, but this was expected.

4G price hike blocked but inevitable ARPUs will rise

StarHub tried to raise 4G premiums in mid-April by SGD2.14 a month for all its tiered subscribers but this was blocked by the IDA, which ruled that existing subscribers should not be affected until their contracts expire. But new and recontracting subscribers will still be affected. As for M1 and SingTel, we think it is just a matter of time before they follow suit and postpaid ARPUs will inevitably rise. Even with the higher 4G premium, StarHub’s postpaid plans remain competitive. For every 100k new tiered subscribers on the higher premium, we estimate a 0.1% benefit to earnings.

Maintain BUY and TP of SGD4.98. Prefer M1

While 1Q14 did not contain any surprises, we believe positive trends such as falling handset subsidies, stabilising roaming revenue and rapid data monetisation will strengthen throughout the year. In addition, net debt/EBITDA ratio fell to a fresh low of 0.4x, which will improve StarHub’s capacity to increase dividends.

Big boost from 4G price hike

• Premium price for 4G service to benefit FY14F/15F earnings by 2%/6%
  
• Corporate fixed line growth to offset weaker broadband & prepaid mobile
  
• Upgrade to BUY with revised DCF-based (WACC 6.5%, terminal 0%) TP of S$4.50, implying potential returns of 16%
  

If 4G prices were to rise to S$10.70, FY15F earnings

could increase by 30%. StarHub will start charging S$2.14 for its 4G service from June 2014 onwards versus its current promotional free offer. The company may further raise the extra charge for 4G to S$10.70 at a later unspecified date. Meanwhile, M1 offers free 4G services till Dec 2014 with regular price for 4G advertised as S$10.70. Elsewhere, SingTel has yet to indicate any intent of following suit. We like to point out that StarHub charges S$8.56 per GB for excess data usage versus S$10.70 by both SingTel & M1. Additionally, StarHub offers extra data-allowance of 1GB than peers on mid- to high-end plans. Even if peers do not follow its premium pricing, we believe StarHub’s 4G plans remain competitive.

StarHub to benefit most from subsidies for SMEs. The government will subsidise SMEs by S$500m over 2014-17 for fibre broadband connections of over 100Mbps. We estimate that Corp. fixed line (~17% of service rev) may grow by single digits to offset the weakness in prepaid mobile (~10% of service rev) and fixed broadband segments (~10% of service rev). Corp fixed line reaps highest EBITDA margins, which we estimate to be 36% versus 20% for pay TV & broadband, and 35% for mobile.

Committed to a fixed 5-Sct DPS each quarter, This translates into a payout ratio of 88%. With FY14F net debtto-EBITDA of 0.5x versus 0.7x for M1 and 0.9x for SingTel, one should expect dividends to rise in FY15F.

Big boost from 4G price hike

• Premium price for 4G service to benefit FY14F/15F earnings by 2%/6%
  
• Corporate fixed line growth to offset weaker broadband & prepaid mobile
  
• Upgrade to BUY with revised DCF-based (WACC 6.5%, terminal 0%) TP of S$4.50, implying potential returns of 16%
  

If 4G prices were to rise to S$10.70, FY15F earnings

could increase by 30%. StarHub will start charging S$2.14 for its 4G service from June 2014 onwards versus its current promotional free offer. The company may further raise the extra charge for 4G to S$10.70 at a later unspecified date. Meanwhile, M1 offers free 4G services till Dec 2014 with regular price for 4G advertised as S$10.70. Elsewhere, SingTel has yet to indicate any intent of following suit. We like to point out that StarHub charges S$8.56 per GB for excess data usage versus S$10.70 by both SingTel & M1. Additionally, StarHub offers extra data-allowance of 1GB than peers on mid- to high-end plans. Even if peers do not follow its premium pricing, we believe StarHub’s 4G plans remain competitive.

StarHub to benefit most from subsidies for SMEs. The government will subsidise SMEs by S$500m over 2014-17 for fibre broadband connections of over 100Mbps. We estimate that Corp. fixed line (~17% of service rev) may grow by single digits to offset the weakness in prepaid mobile (~10% of service rev) and fixed broadband segments (~10% of service rev). Corp fixed line reaps highest EBITDA margins, which we estimate to be 36% versus 20% for pay TV & broadband, and 35% for mobile.

Committed to a fixed 5-Sct DPS each quarter, This translates into a payout ratio of 88%. With FY14F net debtto-EBITDA of 0.5x versus 0.7x for M1 and 0.9x for SingTel, one should expect dividends to rise in FY15F.