Category: StarHub
TELCOs – OCBC
Positive 2QCY09 Scorecard; Maintain Overweight
2QCY09 results resilient as expected. All the three telcos – MobileOne (M1), SingTel and StarHub – reported a pretty resilient set of results recently. Both M1 and SingTel earnings were slightly ahead of our forecast; StarHub’s earnings were in-line. Overall, their earnings demonstrated the resilience of the telcos.
Review of operations. On the mobile front, we note that consumer spending (ARPU) has rebounded despite the economic downturn – partly aided by the growth in mobile data usage. Acquisition costs have also started to trend up again for both M1 and StarHub; M1 has shown the sharpest increase but it has managed to bring its churn rate down. On the broadband front, new additions have stagnated and ARPUs for SingTel and StarHub have declined further. On the PayTV front, StarHub has managed to maintain both its subscriber base and ARPU; SingTel has recently announced that its mio TV subscription have exceeded 100,000.
Stable outlook for rest of 2009. Going forward, all the three telcos expect their Singapore operations to remain stable or show slight growth, with EBITDA margins remaining relatively steady; this as they strive to reduce costs to keep pace with the expected softening in operating revenue. But due to their strong cashflow-generative businesses, the telcos have largely kept their dividend payout guidance; M1 to pay at least 80% of underlying net profit; SingTel to pay 45-60% of underlying earnings; StarHub to pay S$0.18/share, or S$0.045/share per quarter.
BPL uncertainty looms but we are not perturbed. The broadcast rights of the 2010-2012 BPL (Barclays Premier League) would be up for grabs and StarHub’s PayTV business would be affected if it fails to secure the rights. However, we are not perturbed. Yes, SingTel may be looking to add more exclusive content but based on its current mio TV subscriber base, it may not be able to fully maximize the investment. But come 2012, SingTel would be in a better position to benefit as the NBN will fully come onstream.
Maintain Overweight. Although there has been a steady switch into highbeta stocks on hopes of a rapid recovery in both the economy and corporate earnings, we are not entirely convinced. And until we see more concrete signs of a rapid recovery, we would still advocate holding on to these defensive counters for their attractive dividend yields and as a means of diversification. Maintain OVERWEIGHT.
StarHub – Nomura
Our view
EPL remains an overhang, but StarHub is confident of extending these rights. The likelihood of a joint bid is low and the risk of regulatory intervention to keep prices in check is unlikely to see irrational bids, we believe. Operationally, competition is benign and the macro impact moderating – limited earnings risk this year. Femtocell could become a niche offering, but with limited revenue upside.
Anchor themes
– The operating platform could change leading up to the NBN rollout, pay-TV content ownership should become clearer, and the mobile and enterprise segments could see a lagged impact from a macro slowdown.
– Fibre rollout and its impact remains uncertain in Singapore.
StarHub – BT
200,000 users for StarHub’s home line service
THE customer base for StarHub’s home phone line service, Digital Voice, has hit 200,000, doubling in the span of 10 months.
StarHub offered Digital Voice as a free value-added service to StarHub TV customers 10 months ago, while MaxOnline customers have been enjoying the service free-of-charge since 2005.
Digital Voice is delivered through StarHub’s broadband cable network, resulting in cost-savings.
‘Our customers see great value of our Digital Voice service especially when the charges for home fixed-line service offered by the incumbent has increased significantly. With no monthly subscription fees and free local voice charges using StarHub’s Digital Voice, StarHub TV or MaxOnline, customers have saved at least $100 a year,’ said Ong Bee Lian, StarHub’s vice-president of home solutions.
Customers are able to port in their current home phone number or get a brand new Digital Voice number. They can also retain this phone number for life.
‘We will introduce more innovative bundled offerings in the coming months,’ added Ms Ong.
To sign up, StarHub TV or MaxOnline customers can call the subscription sales hotline at 1630, sign up online or visit any StarHub shop.
Telecom – AmFraser
Mobile subscribers grew 1.5% QoQ in 2Q09
• Monthly mobile subscriber net adds picked up to 33,000 in 2Q09, from 25,000 in 1Q09. This represented a 1.5% QoQ growth, and 5.7% YoY growth to 6.5 million subscribers. While the net adds are far off the heady levels seen before 3Q08 and the peak of 113,000 in 4Q07, the pick up (albeit small) is encouraging and marks a trough in 1Q09.
• Total mobile subscribers revised up to YoY growth of 6% in FY09 and 7% in FY10 to 6.7 million and 7.2 million, respectively. While the revision is a marginal 1% and 3% respectively, this marks improving sentiments in the macroeconomic environment in the recent three months. We consider the growth fairly healthy, in a market where penetration stands at 134.6% at June 2009. Prepaid accounted 49% of the market with 51% from postpaid at 2Q09.
• In 2Q09, M1 gained market share helped by strong growth in prepaid. M1’s overall market share inched up from 25.3% in 1Q to 25.6%. M1 added 14,000 monthly prepaid net adds in 2Q as they stepped up promotional offers in the heartlands areas via M1 retailers and chain stores, combined with hefty 50% discounts off IDD rates to several countries. At the same time, SingTel lost overall market share due to monthly net subscriber loss of 2,000 in prepaid, due to deregistrations of inactive SIM users.
• But SingTel gained market share in postpaid, with monthly net adds of 7,000, higher than M1’s 2,000 and StarHub’s 3,000. Interest for iPhone 3G (only sold by SingTel) helped, although postpaid net adds were off the peak of 15,000 in 3Q08 when iPhone 3G was first launched. We expect the stronger trend for SingTel to sustain as the new iPhone 3G S was launched in July. iPhone users also generate an ARPU that is 1.5X that of a normal postpaid subscriber.
• Fall in postpaid ARPU stemmed in 2Q, with improvement in call and data usage. Pospaid ARPU picked up most for StarHub at 3% QoQ, helped by non-voice contribution which rose from 29% of postpaid revenues in 1Q to 30.5%. In terms of data traffic, StarHub enjoyed a 60% surge to 1.6 million GB in 2Q from 1Q09.
• Helped by 3G migration, pure data usage plans revitalises saturated market. In terms of take up for pure data usage plans (including that for smartphones), M1 grew 13% QoQ to 178,000 while SingTel grew 29% QoQ to 226,000. These represented 20% and 15% of their respectively postpaid base (StarHub does not disclose this measure.) Four years after the launch of 3G services, Singapore operators have migrated 78% to 84% of their postpaid subscribers to the 3G networks. 3G subscribers totalled 2.7 million in 2Q09.
• 1H 2009 mobile service revenues held up well, boosted by QoQ pick up in 2Q revenue. In terms of total mobile service revenues (inclusive of IDD), StarHub saw a 1% YoY fall in 1H 2009, while M1’s was flat and SingTel’s rose an estimated 6%.
• Our preferred stock is M1 for 17% upside to fair value of S$2.03/share. For its pure play mobile operations, M1 enjoys EBITDA margins of 45% over the forecast period, and is a pure beneficiary of the next phase of growth in mobile broadband. At this juncture, StarHub and SingTel are trading close to their fair values of S$2.28/share and S$3.05/share respectively and we maintain HOLD ratings on these.
StarHub – BT
StarHub special payout on the cards
STARHUB has been quietly building its cash reserves even as credit streams dried up for many companies during the economic downturn. But with its coffers now swelling past normal levels, the market is starting to expect more active capital management measures from the telco once borrowing costs return to pre-crisis levels. If this happens within the next quarter, StarHub shareholders could well be on the receiving end of a small windfall.
Telcos like StarHub have the benefit of strong cashflows even in times of economic weakness as most customers will still keep their phone lines and Internet connections. While there are some signs of a migration to lower-end broadband plans, the operator’s second-quarter earnings still registered a very respectable 21 per cent improvement to $77.8 million. The company also generated a free cash flow of $263 million for the first six months of the year, a 54.8 per cent jump from a year earlier.
With StarHub choosing not to refinance some of its debt in view of higher borrowing costs, the telco’s leverage, or net-debt-to-Ebitda (earnings before interest, taxes, depreciation, and amortisation) ratio, has fallen to a new low of 1.07 times.
StarHub has always maintained that its optimal net-debt-to-Ebitda ratio is 1.5-2 times. During its earnings conference call last week, CEO Terry Clontz also hinted that the company would look into ways of making its ‘capital structure more efficient’ when credit markets return to normal.
The writing’s clearly on the wall that some form of capital management measure is in the pipeline, but the question is what form it would take.
Shareholders will clearly prefer a special dividend payout as the way to return the excess cash, although the company has no history of taking this route.
According to DMG & Partners head of research Terence Wong, the special payout could amount to 12 cents per share or an additional 5 per cent return on top of StarHub’s already sizeable 8 per cent yield.
However, based on StarHub’s track record, a share buyback or capital reduction could be the more probable option.
Apart from the associated tax incentives, such moves would help to improve earnings per share and return on equity, two common yardsticks for measuring financial performance.
Capital reduction
In 2006, StarHub returned $652 million in cash to shareholders through a capital reduction, cancelling 306 million shares or 14.3 per cent of its issued share capital at the time. The move boosted its return on equity from 23 per cent to 67 per cent as profits were divided by a smaller share capital.
A year later, the operator repeated the exercise by distributing a cash stockpile of $444 million. As a result, its share capital was reduced by another 8.3 per cent. Rivals Singapore Telecommunications and MobileOne have also returned cash to investors by cancelling stock.
Alternatively, StarHub could choose to raise its full-year dividend payout beyond its commitment of 18 cents.
Whatever the form, shareholders are far more likely to receive a small windfall from StarHub rather than a huge one, given that the future is still uncertain.
While the telco will be keen to please shareholders, it will want to maintain some flexibility in terms of capital utilisation.
Top on the list is the $100 million in cash it will sink into its new subsidiary Nucleus Connect over the next five years. This company has been selected by the government to operate Singapore’s upcoming fibre-optic broadband highway, and to resell bandwidth to Internet service providers. Once the new network is in place, competition in StarHub’s pay-TV and broadband markets can be expected to intensify.
Still, even if it turns out to be a small payout, investors should have no reason to complain. While more would have been better, having half a loaf in these volatile times is way better than having none.