Guides for Stable FY09 Outlook

4Q08 results within expectations. StarHub reported its 4Q08 results last night, with revenue down 0.4% YoY at S$536.7m, while net profit fell 10.9% to S$87.5m. But we note that the decline was mainly due to a larger tax credit in 4Q07; pre-tax profit was actually up 8.1% YoY at S$99.0m. And on a sequential basis, revenue was up 2.3%, and while it was about 2.3% lower than our forecast, its net profit jumped climbed 10.2%, which was also about 12.5% above our estimate. Again, the main reason for the “outperformance” was due to a lower-than-expected tax rate (11.6% in 4Q08 versus 21.2% in 3Q08). Otherwise, the results were mostly within expectations.

For the full year, revenue rose 5.7% to S$2127.6m, or about 0.7% shy of our forecast, and also below its growth guidance of 7%, while net profit eased 5.7% to S$311.3m, but still 3.2% ahead of our estimate. StarHub also declared a final dividend of S$0.045/share as promised.

Recovery in mobile revenue. On the mobile front, although revenue was down 1.2% YoY at S$272.2m, it was up 3.0% QoQ, which also reverses the previous quarter’s 1.8% QoQ slide. The rebound was due to the 1.2% QoQ growth in pre-paid customers (following two straight quarters of decline), as well as a pick up in pre-paid ARPU from S$22 in 3Q08 to S$25. For its post-paid segment, although net adds grew by 1.6% QoQ and revenue grew by 1.1% QoQ, ARPU slipped further from S$74 in 3Q08 (S$77 in 2Q08) to S$71; management explained that the decline was due to a higher mix of subscribers on data only plans, as well as lower usages of IDD and roaming services. Meanwhile, StarHub was able to reduce its average acquisition cost per user further from S$104 in 3Q08 to S$86.

Guides for low single-digit growth. Going forward, management expects FY09 operating revenue to grow by low single-digit; it also expects to keep service EBITDA margin at around 31%, and keep its capex within 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.

Keep BUY with S$2.78 fair value. But given the still uncertain economy climate, we are just bumping up our FY09 estimates marginally (0.9% to 1.5%), and due to the slightly higher capex, our DCF-based fair value eases slightly from S$2.81 to S$2.78. Nevertheless, we continue to believe that StarHub’s business remains resilient and coupled with an attractive 8.9% dividend yield, we maintain our BUY rating.

StarHub Q4 net profit drops 11%; full-year revenue hits record

A 17 per cent surge in pay-TV revenue and single- digit sales growth across three other business lines lifted StarHub Ltd to a record full year revenue of $2.128 billion for its fiscal year 2008.

But increased acquisition and retention costs in the first half of the year, as well as higher pay-TV content costs put a drag as full year net income fell 6 per cent to $311 million, from $330 million. Full year earnings per share, on a diluted basis, fell 2 per cent to 18.16 cents, from 18.54 cents.

StarHub yesterday announced the results of its fourth quarter and full year. For the three months ended Dec 31, 2008, sales dipped 0.4 per cent to $537 million, from $539 million in the year-ago period.

Net income fell 11 per cent to $87 million, from $98 million. Earnings per share, on a diluted basis, fell 11 per cent to 5.09 cents, from 5.73 cents.

‘In the fourth quarter, we managed through an increasingly volatile business environment, as the Singapore economy continued to contract – yet we ended the full year with a larger customer base and a relatively strong fourth quarter,’ said StarHub CEO Terry Clontz.

StarHub’s full year sales improved by 6 per cent its previous record of $2.014 billion achieved in 2007. Earnings before interest, taxes, depreciation and amortisation (Ebitda) rose 0.2 per cent to $644 million.

The company is recommending a final dividend of 4.5 cents per share, bringing the total dividends to 18 cents per share for its fiscal year 2008.

StarHub lifted sales across its four key business segments in 2008, led by pay-TV which registered the highest revenue growth at 17 per cent. Mobile, broadband and fixed network revenue grew by four, three and seven percentage points respectively.

Mobile business remained the major revenue contributor at 51 per cent. Pay-TV, broadband, fixed network services and sales of equipment contributed 19, 12, 14 and 5 per cent respectively to the mix.

StarHub also swelled its customer base in key segments. Its mobile customer base grew by less than one per cent to 1,765,000 subscribers at the end of Q4. Pay TV subscribers increased 4 per cent to 524,000; while broadband customers grew 8 per cent to 373,000.

On Monday, rival SingTel announced it grew its mobile phone subscriber base in Singapore by 26 per cent to 2.94 million at the end of 2008, from a year ago.SingTel, which last year scored a coup with its exclusive Apple iPhone deal, is reportedly set to launch the highly-anticipated first version of the Google phone here.

Mr Clontz told BT that StarHub will be focusing on the second-generation of the Google phone instead, and could launch that version before June this year. As for the iPhone, it is ‘still in dialogue with Apple’ but is ‘confident’ of launching it this year.

This year will also see StarHub bidding to become the operating company for Singapore’s next-generation fibre-optic broadband infrastructure.

StarHub last year lost out to a consortium involving SingTel in the first phase of that project. The second-phase winner is expected to be announced by March.

Current Analysis senior analyst Soh Siow Meng said that StarHub, as it plys primarily in the local market, will face challenges posed by competition, expected dip in foreigner population and belt-tightening by businesses and consumers in the coming year. ‘However, there is still room for growth,’ he said.

StarHub shares closed unchanged at $2.02 yesterday.

A star-crossed 4Q?

4Q08 results preview

StarHub is slated to release its 4Q08 results on 10 Feb 09. We expect a core net profit of S$75m-80m, representing flat growth to a 6% contraction qoq as some margin tremors are likely to be felt due to heavier expenditure in the festive period. Yoy, core net profit should be up 6-13%. FY08 core profit is projected at S$299m-304m.

Topline is expected to rise 2-4% qoq, lifted by the festive period, and representing a reversal from 3Q08’s 1.2% qoq contraction. Over the past three years, 4Q revenues have been rising by an average 4% qoq, thanks to the festive season effect. This year, however, harsh economic conditions might have had some impact on StarHub’s topline in 4Q. As such, we believe FY08 revenue may only rise 6%, slightly below StarHub’s guidance of 7% growth.

More pertinently, we expect EBITDA margins to lose close to 1-3% pts in 4Q from a surprisingly strong 3Q. In the past three years, EBITDA margins have been declining on average by 2-4% pts qoq in 4Q. Thus, we are projecting fairly in-line service EBITDA margins of 32% vs. guidance of 31% for FY08. While mobile number portability-induced margin tremors could have faded away and we do not expect a return to those levels, we believe that some margin strain could still occur due to the traditional festive season where A&P expenses tend to rise and the bulk of costs are booked in 4Q. That said, we do not think the impact will be as severe as in most years, judging from the relatively quiet 4Q.

We would be looking for signs of downtrading for StarHub’s suite of products, namely in broadband and cable TV, as consumers tighten their belts.

Dividends. We do not anticipate anything out of the ordinary, with another 4.5cts likely to be declared in 4Q, bringing full-year payout to the minimum 18ct guidance. A special dividend is unlikely with gearing remaining high at 1.2x annualised net debt/EBITDA as at end-3Q08. Historically, StarHub has undertaken capital reduction or special dividend payment only when the ratio trends below 0.8x. What lends further weight to our belief is the tender process for OpCo, which is still in the pipeline. The results of the tender will be made known sometime in 1QCY09, and we do not foresee any payout, if at all, until the outcome is known. The need to conserve cash is paramount under current economic circumstances.

Valuation and recommendation

Maintaining earnings forecasts, DCF-based target price of S$2.50 (WACC: 8.5%, terminal growth: 1%) and Neutral rating. We leave our estimates and rating untouched pending the release of the results, although we are likely to lower our target price post-results. With its diversified base, we believe StarHub’s revenue is most susceptible to an economic downturn. The key event looming this year would be bidding for premier content, most notably that of the British Premier League (BPL) for 2010-2012 and the 2010 World Cup in 3Q09, where a brutal bidding battle is expected. The potential setting up of Premier League TV, while slim at this juncture, could undercut StarHub’s monopoly of the crown jewel of content. Nevertheless, despite the many risks, we maintain our Neutral rating as we believe downside will be limited by its attractive dividend yields of 9%.

Good entry price for yield play

StarHub is a safe yield play in a relatively benign competitive and regulatory environment. Higher cost of sports content might affect its bottom-line in FY10F, but it should not be excessive and has been included in our below consensus estimates. Upgrade to BUY for 13% share price upside and 8% dividend yield.

Stable FY09F earnings despite economic slowdown. It is reasonable to expect lower roaming revenues as Singapore’s tourist arrivals drop. But rising data revenue following offers of unlimited data plans should offset the weakness to a large extent. FY09F will also benefit from the absence of S$6-7m Euro Cup content costs incurred in FY08 and easing competition in the postpaid mobile space.

Least worried about dividends. Management claimed it had sufficient unutilized and committed credit facilities from local banks to meet (i) refinancing needs for the next twelve months, and (ii) capex requirements for OpCo, in case StarHub wins the award. Management believes it can continue to pay average dividend payout of 65-70% of free cash flow, implying upside to our 8.4% yield projection.

PCCW case suggests StarHub might secure EPL again. In our view, PCCW in Hong Kong had secured key channels such as Star TV, HBO, etc., and built a respectable subscriber base before aggressively going after EPL. This is not the case with SingTel, which has a small subscriber base (around 50K) for mio TV with many popular channels still held by StarHub. We estimate the EPL bid price in 2006 was S$40-50m higher than that in 2003, and the magnitude of increase should be comparable in the 2H09 EPL bid, whose impact on the bottom-line will be visible only in 4QFY10.

Upgrade to BUY, S$2.08 target price unchanged. This is pegged to 12x FY09F PER, or 20% premium to our 10x PER target for M1 due to (i) StarHub’s better track record, (ii) no cash tax till FY09F, resulting in 12.5% free cash flow yield and providing sufficient cushion for 8.5% dividend yield.

Sector laggard; time to catch up

Key points:

1) Stock has lagged its peers despite unchanged fundamentals
2) Trading near to 52-week low and backed by 9.4% yield
3) Defensive earnings backed by long dated contracts
4) Stock should begin to outperform given attractive valuation.