Commendable 1Q09 Results

1Q09 results within expectations. StarHub reported its 1Q09 results last night, with revenue down 0.8% YoY at S$530.6m, almost smack on our S$530.0m forecast, while net profit rose 3.1% to S$82.6m, or shy of our S$82.9m estimate; this included a tax credit of S$0.8m due to the corporate tax rate cut from 18% to 17%. On a sequential basis, revenue fell 1.1%, reflecting the economic slowdown, while net profit declined by 5.6%. But we note that the sharper earnings QoQ decline was due to a lower effective tax rate in 4Q08; otherwise, pre-tax profit rose 2.5% to S$101.5m, thanks to lower cost of sales and operating expenses. It also declared a dividend of S$0.045/share.

Drop in mobile revenue. On its key business segment, mobile revenue came off 3.1% YoY and 2.8% QoQ to S$264.7m, mainly due to lower revenue from its post-paid segment, which fell 4.8% YoY and 3.5% QoQ. Although it managed to grow its post-paid subscriber base by 9k users, we note that ARPU (average revenue per user) eased from S$71 in 4Q08 to S$67, hit by lower voice usage, IDD and outbound roaming services, while monthly usage also dropped from 469 to 442 minutes. A higher mix of customers on the discounted MaxMobile Data plans also had a diluting effect on post-paid ARPU. On the other hand, pre-paid revenue rose 2.7% YoY (down 0.5% QoQ), as the base grew by 40k to 914k users, though ARPU slipped from S$25 in 4Q08 to S$24. Mobile EBITDA margin improved from 36.6% in 1Q08 to 37.4%, thanks to lower acquisition cost and quantity of equipment sold.

Guides for stable service revenue. StarHub is guiding for stable service revenue (excludes non-core equipment sales), which management considers as “recurring revenue”. Earlier, management guided for a low single-digit growth in total revenue. On the other hand, it has bumped up its service EBITDA margin from 31% to 32%. It has also kept its capex guidance to 11% of operating revenue. More importantly, based on its projected profitability and cash flow, StarHub intends to continue to pay S$0.045/cent dividend every quarter, totalling S$0.18 for the full year.

Maintain BUY. Overall, StarHub posted a pretty commendable set of results, despite the economic slowdown. As 1Q09 results were well within expectations, we are leaving our FY09 estimates intact; we may see room for upward revision should the economy recovers faster than expected. Maintain BUY with S$2.88 fair value.

StarHub Q1 profit up 3% at $82.5m

But customers now paring mobile phone usage, opting for cheaper Net plans

STARHUB’S net income for the first quarter rose 3 per cent to $82.5 million on the back of a tax gain as well as higher revenue from its fixed network and pay-TV businesses.

However, the firm’s mobile and broadband services are starting to feel the pinch from the economic crunch with some customers already reining in their mobile phone usage and migrating to lower-end Internet plans.

‘Two to three years ago, this (result) would have been unsatisfactory. Today, we are glad that operations have been relatively stable,’ said StarHub chief executive Terry Clontz.

Diluted earnings per share for the period ended March 31 grew 3 per cent from last year to 4.8 cents, while Q1 operating revenue slid to $530.6 million, down marginally by 0.8 per cent from 2008.

Singapore’s second-largest operator has proposed an interim dividend of 4.5 cents per share, unchanged from last year. Despite the tough economic outlook, StarHub expects to keep its full-year cash payout at 18 cents or more.

The firm’s Q1 performance was partly helped by a tax gain of $0.8 million due to a reduction in Singapore’s corporate tax rate. Excluding this tax credit, the firm’s Q1 net income would have been 2 per cent higher at $81.7 million.

On the business front, StarHub’s fixed network business registered the biggest improvement in Q1 with revenue rising 9 per cent from last year to $79.1 million. This growth was largely due to a 13.4 per cent increase in sales from wholesaling bandwidth as well as providing connectivity services to corporate customers in some 800 buildings in the central business district.

When Singapore’s new fibre-optic broadband network becomes operational in 2013, StarHub has the opportunity to break SingTel’s ‘monopoly’ by extending its corporate reach into more office locations, Mr Clontz told reporters in a conference call yesterday.

Besides its fixed network segment, the company’s pay-TV business also registered an improvement in Q1, with revenue rising 5 per cent to $102 million.

StarHub added 3,000 new cable television customers during the quarter to bring its total pay-TV base to 527,000, or around 46.1 per cent of all local households.

However, sales from the operator’s mobile business, which accounts for nearly half its total sales, slid 3.1 per cent from last year to $264.7 million.

This was attributed to a reduction in post-paid subscriber revenue with some users cutting back their voice calls as well as IDD and cellular roaming usage amid the downturn.

The firm added 16,000 mobile customers to bring its total cellular subscriber base to nearly 1.82 million at the end of Q1.

Revenue from StarHub’s broadband business also fell in Q1, dropping 2.6 per cent to $62.4 million.

This is because more customers are opting for upfront subscription discounts instead of free gifts due to the ongoing recession.

In addition, there is also some migration towards lower-speed broadband plans during the quarter, explained StarHub’s chief operating officer Tan Tong Hai. At the end of Q1, the firm’s cash and cash equivalents stood at $244.7 million while borrowings totalled $924.4 million.

For the full-year, StarHub expects revenue from its telco and Internet services to come in at around $2.03 billion, unchanged from last year.

Ebita margin is forecasted to be roughly 32 per cent of this number, while capital expenditure will be less than 11 per cent of total operating revenue in 2009.

StarHub shares closed 2.1 per cent higher at $1.92 before it released its Q1 results.

Funding capital spending a key issue at StarHub

FEARS that StarHub could initiate a cash call sparked a flurry of questions from shareholders about the operator’s capital expenditure (capex) plans for the year at its annual general meeting (AGM) yesterday.

Minority shareholder Tan See Peng got the ball rolling with a barrage of queries revolving around the group’s outstanding bank loans of $914 million and whether there are plans for major cash outlays in 2009.

‘I’m just afraid you (StarHub) will turn to us (for cash),’ he quipped. His concern could stem from the right issues called by other corporate titans such as DBS Group, CapitaLand and Chartered Semiconductor in recent months.

Moreover, StarHub recently landed the government’s OpCo tender for operating the nation’s upcoming fibre-optic broadband network and there may be some uncertainty about the investments required for this project,

‘This (OpCo) will have some requirements on capex, but we have sufficient resources, as well as lines of credit to fund the expenditure,’ said StarHub chairman Tan Guong Ching.

The operator has previously said that it expects to pump in $100 million over the next few years to set up its OpCo venture. The new unit is projected to require an annual capital spending of around $40 million over the next 25 years.

‘We have a very strong cash flow. It’s more than sufficient to pay for capex as well as for the repayment of loans,’ he assured shareholders.

StarHub’s AGM typically attracts a smaller crowd compared to rivals Mobile One and Singapore Telecommunications as the stock is largely owned by institutional investors.

While the annual gathering is usually wrapped up in less than hour, yesterday’s AGM stretched to nearly 90 minutes with queries about the pay of StarHub directors prolonging the latter part of the question-and-answer session.

They were mostly fielded by shareholder Tony Tan, who also owns shares in M1. Armed with a detailed analysis of the two companies’ financial statements, he quizzed StarHub’s rationale for paying its directors a remuneration package of $1.078 million, a figure which he said is ‘2.8’ times higher than that of its competitor.

In addition, he queried StarHub’s need for having a large board composition of 13 members when rival M1 was doing the opposite by shrinking its directorate pool.

‘We have diversified revenue. The experience needed for some of these (segments) is very different. The complexity of their (M1’s) business is different from ours,’ StarHub CEO Terry Clontz explained.

This is because StarHub is among a handful of operators capable of offering a complete suite of Internet, telephony and pay-TV services, he added.

‘This (diversification) will cushion us against a downturn in any particular sector,’ said StarHub chairman Mr Tan, adding that its mobile business is already seeing signs of a slowdown due to Singapore’s saturating mobile phone user base.