Category: StarHub
StarHub – CIMB
A difficult 2Q
Results preview
Margin compression. We do not anticipate any surprises in StarHub’s 2Q08 results, which are scheduled for 6 Aug. We expect 2Q08 core profit to slip 1.2% qoq and 2% yoy. Although revenue should grow 2.4% qoq or 12% yoy, EBITDA margins are expected to come in at 30.5% in 2Q, vs. 31.3% in 1Q, as we believe StarHub’s margins will be compressed by higher subscriber retention and acquisition costs ahead of mobile number portability (as with MobileOne) and SingTel’s aggression in building market share. All in, we expect results to be in line with our expectations of FY08 revenue growth of 10% and core net profit nudged up 1% yoy.
Margin risks. Although churns from mobile number portability have been fairly limited thus far, a jostling for subscribers ahead of implementation could have squeezed margins in 2Q, on higher subscriber and acquisition costs. M1’s subscriber and retention costs rose 22.8% qoq and 38% yoy in 2Q while its core EBITDA margins declined 1.3% pts qoq.
Steady dividends. We expect StarHub to declare a DPS of 4.5cts for 2Q, unchanged from 1Q. We do not expect substantial increases in payouts until the results of its bid for the National Broadband Network’s Netco is known. We expect OpenNet, the SingTel-led consortium, to win the bid.
Prepaid impaired by competition. We will be looking for indications of any bottoming out for prepaid metrics:
• StarHub’s prepaid subscriber market share slipped 2% pts qoq to 34.1% in 1QCY08.
• Prepaid ARPU fell to S$22 in 1QCY08 from S$27 in 4QCY06.
This is worrisome, considering that prepaid revenue accounted for about 11.7% of StarHub’s 1QCY08 revenue. We expect these trends to persist in the foreseeable future until SingTel eases off its pursuit of market-share gains.
Valuation and recommendation
Maintain earnings forecasts, NEUTRAL rating and target price of S$3.20, still based on DCF valuation (WACC of 7.5% and terminal growth rate of 1.7%). Pressure on margins and market share exerted by a combative SingTel on top of the erosion of its broadband and prepaid franchise weighs on the stock.
On the flipside, attractive yields should cap downside risk for StarHub, in our opinion. Our above-consensus yield outlook of 9.4% for CY08 is the highest for Singapore telcos. This yield outlook is supported by free cash flow yield estimates of 9.3% for FY08 and expectations of OpenNet winning the bid for NBN’s NetCo. StarHub remains our preferred yield stock over M1 due to its more diversified earnings and higher management commitment to return capital than M1.
TELCOs – OCBC
Defensive bet in these uncertain times
Frenzy over MNP. The introduction of true mobile number portability (MNP) on 13 June in Singapore was greeted with a big bash, with both SingTel and StarHub holding roadshows on 12-15 June, in conjunction with the PC Show 2008. Also evident were the blitz of full page advertisements from all three telcos, dangling attractive sign-up freebies and discounts, both in a bid to retain their existing subscribers and attract new subscribers. In addition, the telcos have taken to slashing prices for even the latest and hottest mobile phones by as much as S$600, versus the typical subsidy of around S$300-400/handset previously. This is expected to further increase the acquisition cost per subscriber, which has already seen significant increases in the previous quarter; for example, SingTel’s postpaid customer cost jumped 40% YoY to S$313 in the March quarter; StarHub’s acquisition cost rose 35% to S$124 in the same quarter.
Churn rate likely to rise. Although the churn rates are likely to increase in the next few months after the start of MNP, from about 0.8% for SingTel, 1.1% for StarHub and 1.3% for M1 in the March quarter, we do not expect any large migration of users. First, there is not much to choose between the operators in terms of services; secondly, the majority of subscribers are already locked-in to two-year contracts. More importantly, none of the telcos has actually made any price adjustments to their subscription plans, thus reducing the risk of a debilitating price war. Nevertheless, we are looking for some margin compression for the next few quarters, and will be adjusting our estimates accordingly after we see the June quarter results.
Defensive bet in these uncertain times. Going forward, we continue to expect flat to steady topline growth for the three telcos, even if there is a slowdown in the economy, as the usage of mobile phones has become an integral part of our daily lives. This can be seen in the high penetration rate that Singapore has achieved over the past few years, where it has been hovering above 100% since Sep 2006. And with their strong cashflow generating abilities, we believe their good dividend yields, at least for both M1 and StarHub, would be a good defensive bet in these uncertain times. We maintain our Overweight rating on the sector.
StarHub – Morgan Stanley
Capital Management More Visible
Conclusion: We upgrade StarHub to Overweight from Equal-weight with a slightly higher price target of S$3.25. Aside from the 19% upside to our price target, the stock offers a dividend yield of 6.5%, pointing towards a total return of 25% on a 12-month view. StarHub offers a solid defensive option in the midst of continued volatility in equity markets, given the stock’s attractive dividend yield and high earnings visibility.
Rationale for Our Upgrade:
1) We expect the competitive environment in the mobile market to stabilize, as operators have re-contracted 80-90% of postpaid subscribers. In our recent meetings, all operators maintained their margin guidance for ’08, which implies improving competition in 2H08.
2) We expect StarHub to announce S$400-500 million capital management initiative in 2H08, as the company’s gearing levels are running below targets and further progress on NGN discussions implies management has better visibility on medium-term capex plans.
3) Competitive threats from NBN are not expected to emerge until 2010-11. Moreover, the fact that both consortia have existing operators as dominant players implies modest disruption to competitive environment even in the medium term. STH’s bundling strategy remains a key long-term competitive advantage.
Valuation: StarHub shares are now trading at ’09E P/E of 12.9x and ’08E dividend yield of 6.5%, which is 300 bps above the Singapore government bond yield. We believe earnings visibility is improving and dividend yield is attractive.
StarHub – DMG
Sparky’s Back for Another Challenge
In 2002, Sparky the Jack Russell Terrier created a splash and quickly became the most recognisable and well-loved telco mascot. Back then, the budding canine celebrity had a mission – to show Singapore that Starhubwas as good as its established rivals by roaming around the island (and later, overseas) to test the mobile coverage of the fledgling telco. Following the successful act, Sparky disappeared for 4 good years and is now making a timely comeback to tide StarHub through another challenging period, as the telcos slug it out with the advent of full mobile number portability (MNP).
Full MNP will leave some temporary scars. MNP was introduced on 13 Jun 08, but the effect has already been felt over the past few months. Market share among the 3 is unlikely to be shaken much, but the amount of marketing and promotional dollars thrown in will lead to pressured margins. In StarHub’s case, average acquisition cost surged 28% to S$124 per subscriber. We are, however, more sanguine on its long-term outlook. On the macro front, the telco players in Singapore have generally co-existed well over the years and have not succumbed to ‘destructive’ competition. At a company level, we believe that StarHub’s ‘hubbing’ strategy mitigates ARPU pressures and improves client loyaltyin the long run.
Promised payout. StarHub has committed to a minimum dividend payout of S$0.18 per share, which works out to a relatively attractive yield of 6.5%.The company is expected to raise the payout if its capex requirements remain low. However, it will unlikely confirm its capex plans till after the award of the NetCofor the Next Generation National Broadband Network, which is expected to be in 3Q08.
Dip creates buying opportunity. StarHub was covered by OSK butwill be transferred to DMG following this report. OSK previously downgraded the stock to NEUTRAL with a target price of S$3.30 on 8 May 08. The stock price has since fallen by 11% to S$2.78. While our revised target price of S$3.10is lower than OSK’s, the potential upside following the decline makes the stock attractive once again. Upgrade to BUY.
TELCO – DBS
Big brother’s guidance positive but no near term catalysts
SingTel aggression not for long term: We do not subscribe to the view that SingTel would continue to be aggressive on market share gains for bigger scale that could be useful for National Broadband Network (NBN). Its experienced management is well aware of the fact that competitive response would halt its advance and hurt earnings of all players including its own.
Market share focus was a tactical move. We believe that SingTel focused on market share gains last year in order to (1) re-contract post-paid subscriber base three to six months ahead of full mobile number portability (MNP) introduction in June 08 (2) re-position itself to capture growth in the rapidly growing pre-paid mobile segment. It was a tactical move that paid off initially but strong competitive reaction rendered the move ineffective as SingTel’s EBITDA for Singapore declined 1% despite strong 10.7% revenue growth in 1Q 2008.
Margins should improve in 2H 2008 as evident from SingTel’s guidance for Singapore. There is hardly any room for SingTel’s Singapore margins to drop further given its stable margin guidance for Singapore in FY09. In the near term, we expect the three Telcos to report lower EBITDA margins YoY but higher QoQ in 2Q 2008 due to MNP from June 08. However, we expect to see margins reverting back to healthy levels in 2H 2008, when operators would be done with re-contracting their subscriber base. This is also reflected in the stable margin guidance issued by StarHub and M1.
SingTel involves risk of overpayment for overseas acquisitions. SingTel is under pressure for making overseas acquisitions in order to deliver on its guidance of double-digit earnings growth in the medium term, which we think is not possible without new acquisitions. However, acquisitions are no longer cheap with the rush among big global Telcos to acquire companies in emerging markets that may not be earnings accretive initially.
Downgrade the sector call to neutral with M1 as top pick. M1 is cheap at about 11x FY08 PER compared to 14.8x for StarHub and 14.7x for SingTel. Its dividend yield is highest among all the Telcos at 7.4% compared to 5.7% for StarHub and 3.4% for SingTel. StarHub trades at about 35% premium to M1’s PER valuations and the expected news flow on NBN could have an adverse impact on StarHub given that NBN would break StarHub’s and SingTel’s broadband duopoly with M1 as the chief beneficiary.