Category: StarHub
StarHub – GS
Stable free cash flow; potential near-term catalyst if wins OpCo bid
What’s changed
StarHub’s recent 4Q results were better than expected and management guided for “low single digit” revenue growth for 2009 despite the sharp slowdown in Singapore’s economy. We have raised our 09/10/11 earnings forecasts by 4%/4%/2% on the back of higher revenue expectations and increase our 12-m SOTP based TP to S$2.51 (from S$2.45). Although we think that there is risk to StarHub’s revenue growth guidance given macro uncertainties, we are more confident that it will be able to maintain its free cash flow (FCF) to support its S$0.18 (9% curr yield) minimum dividend guidance, due to its low capex and stable margins.
Implications
A potential upside risk to StarHub’s FCF would be if it wins the right to build the “OpCo” portion of the National Broadband Network (NBN). The winner should be announced this month. Although building OpCo would increase StarHub’s capex over the next several years, we nevertheless believe it could be a positive catalyst for the stock, as we think the project will be value accretive. Importantly, StarHub’s management has said that it is confident it could still meet the S$0.18 annual dividend even if it is building the OpCo. In the event that StarHub does not win the bid, we do not believe there is meaningful downside risk to the stock, as the market does not appear to have priced in any potential OpCo upside.
Valuation
StarHub trades at 2009E FCF/equity and FCF/EV yields of 11.7% and 9.6%, respectively, which we view as attractive relative to its regional peers’ yields of 8.7% and 8.5%. Furthermore, we think that downside risk to the share price is limited, as it should be supported by its high dividend yield of 9%. We derive our TP by capitalizing our estimate of StarHub’s 2009E normalized FCF at 13.4x. We maintain our Buy rating (on Conviction list).
Key risks
A large demographic shift in which foreign workers leave Singapore.
TELCOs – OCBC
Stable 2009 outlook
Resilient 4Q CY08 earnings as expected. All the three telcos – MobileOne, SingTel and StarHub – reported a pretty resilient set of results recently. M1’s 4Q08 results, though slightly weaker YoY and QoQ, were slightly better than expected, aided by an improvement in EBITDA as it had been less aggressive during the traditionally competitive holiday period. SingTel’s 3Q09 results were broadly in line with our forecasts, although there was some disappointment with its regional associates’ performances. Likewise for StarHub, its 4Q08 results were also within our expectations, while its FY08 earnings were slightly better than our estimate.
Operationally still going strong. But more importantly, all three telcos expect their operations to remain stable in 2009. For M1, it is also looking to keep its service EBITDA margin of 43-44% and maintain its 80% dividend payout ratio. For SingTel, it expects operating revenues for both Singapore (excluding SCS) and Australia to grow at mid single-digit levels, with Singapore’s EBITDA margin staying at 40%; but warns of lower associate contributions and adverse forex movements. Lastly, StarHub expects FY09 operating revenue to grow by low single-digit, while keeping service EBITDA margin at 31%; more importantly, it aims to continue to pay S$0.045/share dividend quarterly, making for S$0.18 total for the full year.
More rational competition amid slowing economy. But the rapidly slowing economy will continue to impact consumer spending, and while we do not expect the telcos to be spared, we believe that the impact should be relatively limited as we see telecom services as being a need rather than as a luxury. We also expect less aggressive sales & promotion (S&P) expenses. We have already been seeing an easing in the telcos’ acquisition costs over the past two quarters and we see this trend continuing although M1 may have to maintain a relatively higher S&P ratio versus the other two telcos to make up for its lack of bundling abilities. Otherwise, we expect the telcos to maintain status quo.
Maintain Overweight on telcos. Even though we are penciling in modest declines in both revenue and earnings for all three telcos this year, these declines pale in comparison to expected tumble in earnings of companies reliant on discretionary spending. Hence we still expect telcos to show relative outperformance this year, backed by their attractive dividends (M1 and StarHub). As such, we maintain Overweight on the sector.
TELCOs – DMG
4Q08 in a nutshell
Hits & Misses. The Oct-Dec 08 period presented a mixed bag of results, with StarHub outperforming, SingTel coming in line, and M1 disappointing. All three showed improvements in the Singapore business and benefited from a moderating competitive landscape.
Balance sheet strong. Gearing appears high for the industry but should be no concern as it is a result of sound capital management over the past few years. Net debt/EBITDA (0.7-1.2x) and EBITDA/Interest (19-42x) are at healthy levels.
Mobile margins improve. EBITDA margins have improved 2.0 ppt QoQ as the telcos toned down on subsidies and advertising & promotions expenses. Prior to which, the mobile business was on a declining trend, no thanks to the red-hot competition as the telcos fought hard to gain market share with the introduction of Mobile Number Portability (MNP).
ARPU lower for broadband, but higher for Pay TV. SingTel and StarHub have been slashing prices (and upping the goodies) to lock in customers before the roll-out of the NBN, upping the ante for M1. Meanwhile, StarHub’s Pay TV ARPU rose 4% to S$57 per month despite competition from mio TV.
What to look out for in the coming months? The OpCo results will be out by the end of 1Q09, and we expect the contest to be close. The impact of NBN as well as retrenchments should also be felt by telcos this year.
Still stellar yields. Telcos still offer one of the best yields in the market. Among the three, only StarHub has given an explicit guidance on its dividend payout for the current year (S$0.18 per share). Both SingTel and M1 have instead stuck to a range. On average, the industry is yielding 6.9%, attractive compared to the market average of 5.5%. We maintain our OVERWEIGHT call on the sector, with StarHub as our top pick.
StarHub – Phillip
FY2008 results
FY2008 results. StarHub reported FY2008 operating revenue of S$2,127.6m (+5.7% yoy) and net profit of S$311.3m (-5.8% yoy). It also declared a final dividend of S$0.045 per ordinary share, bringing the total dividend for FY2008 to S$0.18 (+12.5% yoy) per share. This was higher than the total dividend of S$0.16 last year. Net profit dropped because of higher acquisition and retention costs. This was a result of mobile phone numbers becoming portable on 13 June 2008. In addition, tax expenses were higher in FY2008 because there was credit adjustment for deferred tax assets and tax adjustment for revision in corporate tax rate in FY2007.
Performances of the various business units. StarHub reported strong growth in most of its business units: mobile revenue was S$1,079.0m (+4.0% yoy), Pay TV revenue was S$398.2m (+16.5% yoy), broadband revenue was S$253.2m (+2.5% yoy) and fixed network service revenue was S$299.9m (+7.1% yoy). This was because StarHub was successful in attracting new customers to its services. As at 31 December 2008, the number of customers for its mobile, Pay TV and broadband businesses were 1,765,000, 524,000 and 373,000 respectively. Pay TV outperformed as there was higher take-up of premium channel and strong growth in the subscriber base.
However, sale of equipment fell to S$97.3m (-9.8% yoy). We felt that this could be due to consumers turning more cautious in their purchases during the economic slowdown.
Profit margin. Net profit margin increased from 15.2% in 3Q FY2008 to 16.3% in 4Q FY2008 mainly due to higher mobile, Pay TV and broadband revenue. Based on a year-on-year comparison, it fell from 16.4% in FY2007 to 14.6% in FY2008 because of higher cost of services and operating expenses.
The actual revenue and profit were 5.4% and 2.3 percent below our forecasts respectively. This can be attributed to the economic slowdown, which resulted in the number of new customers below our expectations. Moreover, the introduction of mobile number portability resulted in higher costs.
FY2009 Outlook. StarHub will upgrade its mobile networks and promote its Demand TV service to attract new customers. It expects growth in its operating revenue in FY2009 to be a low single digit. Furthermore, it intends to pay a minimum cash dividend per quarter of S$0.045 per ordinary share, bringing the total to S$0.18 for the full year.
HOLD recommendation, target price cut from S$2.99 to S$2.14. In view of the worse-than-expected financial results and the negative impact from the recession on future earnings, we have reduced our target price from S$2.99 to S$2.14 under the discounted cash flow (DCF) model.
Although StarHub offers its services only in Singapore, it continues to be an attractive stock as it offers dividend yield of 8.7%. We kept our Hold recommendation because of limited upside in the share price to our target price of S$2.14.
StarHub – DBS
Firm guidance reassuring
StarHub’s net profit of S$87m (-11% y-o-y, +10% q-o-q) was slightly better than our S$83m estimate due to lower subscriber acquisition costs. Management guided for (i) 18 cents DPS for FY09 vs our 16 cents expectations, (ii) lowsingle digit revenue growth and 31% service EBITDA margin for FY09, and (iii) capex at less than 11% of sales. We think the 32% margin is a possibility given easing competition. Maintain BUY for stable earnings and 8.9% yield, with a revised target price of S$2.20.
Impact of recession vs easing competition. The impact of recession is already visible in lower roaming fees and usage, which led to lower ARPU for postpaid mobile. Going forward, we might also see a drop in prepaid subscribers. On the other hand, lower subscriber acquisition and retention costs after operators halted aggressive handset subsidies could offset the adverse impact of a recession to a large extent, if not completely.
8.9% dividend yield supported by 11% FCF yield. While FY09F dividend yield looks safe, potentially lower capex from FY10F onwards after StarHub completes its three-year network spending on billing and IT systems in FY09 could lead to higher free cash flow even if earnings do not improve.
Maintain BUY with revised S$2.20 TP. We raised our FY09F and FY10F earnings by 5% each after imputing the recently announced job-credits and corporate tax reduction. Our target price is pegged to 12x FY09F PE, which is a 20% premium to our 10x PE target for M1. The premium is premised on (i) StarHub’s better track record, (ii) no cash tax until FY09F because it has sufficient deferred tax assets, and the resultant 11% free cash flow yield should support the 8.9% dividend yield.