4Q09 below DBe on weak margins but yield sustainable

4Q09/FY09 profit below DBe but Buy for the yield

STH’s S$74m 4Q09 NPAT was below our S$78-80m forecast as mobile margins compressed to recent lows on the iPhone launch. As a result, FY09 total profit at S$320m was S$9m/3% below DBe. But FY09 free cash flow at 27c/share was better than expected and STH is still targeting a minimum FY10e 20c/share dividend – a target we view as achievable even given FY10e capex guidance. We therefore maintain Buy for the 9.2% yield and STH is our preferred S’pore telco.

4Q09 margin weakness distracts from good revenues

The key 4Q09 theme was the significant mobile margin compression which drove total EBITDA down 12% QoQ and 8% YoY to S$152m giving a 27.7% margin (the lowest since 2Q08). There was similar substantial compression in fixed margins. But this margin weakness masked strong revenue performance with both 4Q09 total and service revenues hitting new quarterly highs primarily on good mobile performance, e.g. the best post-paid mobile net adds since 3Q08 and mobile ARPU stabilization. 4Q09 service revenues were up 1.3% YoY to S$521m and the S$2,150m total FY09 revenues were slightly ahead of DBe.

4Q09 NPAT lowest since 2Q08 but dividend stable

As expected, STH’s 4Q09 profit benefited from a net tax credit adjustment but even so, the S$74m profit was down 15% YoY and 13% QoQ. Total FY09 profit at S$320m was up 3% YoY giving 18.7c EPS. But the 27c FCF/share is significantly ahead of the FY09 dividend per share and the company remains committed to its FY10e 20c/share dividend target. Given STH’s balance sheet, this is achievable despite guidance for FY10e capex to increase to 14% revenues (DBe 13%). Furthermore, management is more confident than DB on revenue outlook with FY10e revenue growth guidance set at “low single digits” versus DBe’s -3%.

Maintain Buy as still our preferred S’pore telco

We maintain our S$2.35 target price. Our valuation is based on DCF (7.2% WACC, 0% g) and our target price implies an 8.5% yield at a target 12.4x FY10e PE. Given the 8% upside to our target price and 9% sustainable yield, we reiterate Buy and STH remains our preferred S’pore telco and one of our recommended Asian yield telcos. Risks primarily relate to content costs and competition

A quarter less-encouraging

• Results below expectation

4Q09 NPAT declined 15% y-y to S$74mn. Mobile, pay TV, fixed network recorded 2-3% revenue growth; broadband revenue declined 8% y-y. Equipment revenue jumped 30% y-y due to the iPhone launch. Margin decline was largely on account of higher equipment costs related to the promotional period and iPhone launch during the quarter. Sequentially, segmental margins were weak with cellular at 32.6%, cable & broadband at 20% and fixed network at 35.9%.

• An expensive growth for the quarter

Mobile net-adds were almost sequentially flat at 34k. However, 16k postpaid net-adds lagged M1’s 19k. Driven by postpaid segment, blended ARPU improved by 1% q-q to S$46. However, mobile churn continued to remain high due to what StarHub described as SingTel’s “aggressive promotion” ahead of StarHub’s iPhone launch. Postpaid SAC reached another high of S$106, a 43% q-q increase. Pay TV saw 4k net-adds, consistent with prior quarters. Broadband net-adds were strong at 8k, but ARPU declined another 2% q-q to S$49.

• Challenges ahead

Management reaffirmed its 20c dividend guidance for FY10 despite 14% capex/sales, which is positive and will keep its yield appeal of ~9%. However, the concern remains on market share risks from NBN rollout and the loss of BPL on its hubbing strategy. Both domestic peers are aggressive and now with the rising push for smart-phones, margins for all carriers could be at risk. We maintain REDUCE with a revised S$1.78 price target (from S$1.82) and recommend switching into SingTel (ST SP; BUY; S$2.98) and M1 (M1 SP; BUY, S$2.03) in

the domestic context.

4Q09 results may surprise on upside

4Q09 results may surprise on upside. StarHub Ltd is due to release its 4Q09 results on 4 Feb, and its results may surprise on the upside, if the better-than-expected 4Q09 results from rival MobileOne are any indication. As a recap, M1 saw operating revenue jump 11.0% YoY and 14.8% QoQ to S$216.2m, while net profit climbed 1.6% YoY and 8.8% QoQ to S$37.2m, no doubt aided by the timely launch of the Apple iPhone 3GS in Dec. For StarHub, we are expecting revenue to come in around S$546.6m and net profit of S$77.1m, although we do not rule out the iPhone launch giving a similar boost to StarHub’s 4Q09 performance. On the dividend front, StarHub has also committed itself to paying out a quarterly cash dividend of S$0.05 per share.

2010 outlook also likely to improve. Going into 2010, we believe that StarHub is also likely to be cautiously more optimistic about its mobile operations, just like M1, buoyed by the global economic recovery and opening of the two IRs (Integrated Resorts) in Singapore. Still, StarHub will be facing a big shake-up in its Pay TV segment with the loss of the coveted EPL (English Premier League) broadcast rights for 2010-2012 season. But StarHub believes that the impact of the loss of its premier sports content will remain EBITDA neutral, as it expects just 10% of its 535k subscribers to give up its pay TV services completely, and this will be balanced by lower sports content cost. However, we are less sanguine. Instead, we believe the loss is probably closer to 15-18% and it will also suffer a double whammy in terms of ARPU.

NBN boost to fixed network segment. On the other hand, the roll-out of the NBN from mid-2010 should give a lift to its fledging fixed network services. Besides winning the OpCo bid through its subsidiary Nucleus Connect, the “open” framework will allow StarHub to reach out to thousands of non-residential buildings that it currently does not service today. It should also be able to enjoy cost savings from the current leasing expenses it needs to pay SingTel. However, StarHub notes that competition may increase ahead of the NBN launch from mid-2010.

Maintain BUY with S$2.29 fair value. As FY09 results are just around the corner, we hold off revising our FY10 estimates, but we continue to like Starhub for its defensive earnings and attractive yield (~9.4%). Maintain BUY with S$2.29 fair value.

StarHub rings in mobile TV makeover

STARHUB yesterday launched a set of new software that brings its mobile TV service closer to the living room TV viewing experience. And Singapore’s biggest pay-TV provider is planning to bring out more mobile channels to grow this fledgling business prong.

‘Voice will become a bit of a commodity. We need to find new ways to get customers and bring revenues in. Mobile TV is definitely a way forward,’ said new StarHub CEO Neil Montefiore at the launch, in his first media event since taking over the reins of the telco from longstanding helmsman Terry Clontz earlier this month.

StarHub’s new software is a mobile TV client application that provides channel surfing, programme guides and other familiar TV touches. It runs on the Android, BlackBerry and Windows Mobile smartphone platforms, and will be available on the iPhone and Nokia Symbian platforms by first quarter this year.

The telco said it had worked with mobile phone vendors like Acer, HTC, LG, Motorola, Research In Motion (RIM), Samsung and Sony Ericsson to ensure software compatibility.

In conjunction with the launch, StarHub yesterday announced four new mobile channels – TVB Jade, TVBS-News, The History Channel and E! Entertainment – bringing the total number of channels to 24.

‘We will continue to add more channels,’ said StarHub’s head of products and solutions Chan Kin Hung.

He said the subscriber base for the service has swelled 10-fold in the past year and is now being watched by 100,000 viewers a month.

Launched a year ago, StarHub’s mobile TV service is available at a daily rate of $1 for unlimited viewing, and for a monthly subscription rate of $25.

Sing the blues away with StarHub’s KaraOK!

EVER croaked in front of your colleagues whilst singing karaoke and embarrassing yourself? Well, StarHub may have a solution to your problems. On Monday, the info-communication company will launch a new service named KaraOK!, which allows customers to access karaoke videos through their HubStation or Hubstation HD set top boxes.

The service will be offered on either a monthly or a daily basis. StarHub TV Customers will be able to subscribe to the service at $10/month or pay $4.50 for a 24-hour period. Some 5,000 videos will be made available from launch, with about 100 videos to be added weekly.

The full library of 30,000 karaoke videos in various languages is estimated to be available by the end of the second quarter. Songs made available will range from classics to the latest releases, with more than 10 song categories available to customers.

StarHub has linked up with at least 10 record labels including Warner Music Singapore, Sony Music Singapore and Universal Music Singapore in order to keep its library up to date. According to Tan Tong Hai, chief operations officer of StarHub, the service aims to be more of a complementary service than a direct competitor to karaoke operators. Those interested in trying out the service may visit the KaraOK! roadshow at Plaza Singapura from Jan 25-28.