StarHub plans major infrastructure upgrade

FOLLOWING hot on the heels of arch-rival SingTel, StarHub plans to boost the speed of its mobile broadband services through a major infrastructure upgrade.

The operator’s existing 3.5G or HSPA (high speed packet access) network will get a facelift over the next 12 months to deliver better coverage island-wide and handle larger volumes of mobile data.

SingTel and M1 have introduced HSPA networks to power their mobile broadband offerings, but StarHub is claiming a speed victory over its competitors through this upgrade.

When its move to HSPA+ is completed in the second quarter of 2009, its download speeds will increase to 21Mbps (megabits per second) – a 1.5 times improvement from the current limit of 14.4 Mbps.

This means customers will be able to surf the Internet and download e-mail attachments on the move at speeds that are superior to most fixed-line broadband packages available today.

Uplink speeds will also be improved, from 1.9 Mbps currently to 11Mbps, slashing the time needed to add large files to Web pages or email documents.

The upgrade will increase the number of StarHub mobile base stations to at least 3,500. This is because operators need to add more such equipment to accelerate data transmission over the cellular airwaves.

‘Since our 3.5G launch in 2007 we have seen a dramatic 23-fold increase to our mobile data traffic as more and more mobile customers surf the Internet wirelessly, and access our mobile TV content,’ said David Stone, StarHub’s integrated network engineering head, said in a statement yesterday.

StarHub’s transition to HSPA+ will be funded from a $200 million war chest it previously set aside for the rollout and enhancement of its third-generation mobile network.

Like its previous upgrade, the contract for the new project has again been awarded to Chinese network equipment giant Huawei Technologies.

Last week, SingTel said it will invest $220 million in an island-wide network upgrade to set the stage for higher-speed mobile broadband services.

Strong results; within expectations

1Q FY08 results. StarHub reported 1Q operating revenue of S$534.9m (+13.2% yoy) and net profit of S$80.1m (+14.5% yoy). Moreover, EBITDA increased to S$167.7m (+6.3% yoy). It also declared an interim dividend of S$0.045 per ordinary share, which was higher than the dividend of S$0.035 last year.

Performances of the various business units. StarHub reported strong growth in its business units: mobile revenue was S$273.2m (+12.7% yoy), cable TV revenue was S$97.2m (+22.7% yoy), broadband revenue was S$64.1m (+6.0% yoy), fixed network service revenue was S$72.7m (+6.7% yoy) and sale of equipment was S$27.8m (+23.7% yoy). As at 31 December 2007, the number of customers for its mobile, Pay TV and broadband businesses were 1,799,000, 508,000 and 352,000 respectively.

FY08 Outlook. StarHub expects continued growth in its operating revenue in 2008 to be approximately 10% and will pay a minimum annual cash dividend of 18.0 cents per ordinary share for 2007. The EBITDA margin is estimated to be about 33% of service revenue and the cash capital expenditure as a ratio of operating revenue will not exceed 12%.

It has introduced new services to meet the demands of its customers. For example, it has launched a new flat rate data roaming service to give customers a simplified rate structure and better control on costs while roaming outside Singapore. Moreover, in the Pay TV business, it continues to add more content and variety to its TV programmes to appeal to more audience. Furthermore, it has teamed up with City Telecom (HK) Limited and M1 to jointly submit a bid for the Next Generation National Broadband Network (NGNBN) project.

HOLD recommendation, target price maintained at S$3.30. StarHub is attractive as a dividend play although its operations are focused on the Singapore market. Due to limited upside in the share price, we are maintaining our hold recommendation on the stock and fair value at S$3.30.

1Q08 results mostly in line

1Q08 results within expectations. StarHub Ltd posted a relatively good set of 1Q08 results, with revenue up 13.2% YoY (down 0.7% QoQ) to S$534.9m, meeting about 24.2% of our FY08 estimate, while net profit rose 14.4% YoY (down 18.6% QoQ) to S$80.1m, or around 23.9% of our FY08 number. EBITDA posted a 6.3% YoY (+6.5% QoQ) rise to S$167.7m, but margin eased from 35.0% in 1Q07 to 33.1%. Dow Jones poll was expecting StarHub to post earnings of S$84.7m on revenue of S$534.0m. StarHub also declared a quarterly tax-exempt dividend of S$0.045, up from S$0.035 a year ago, in line with its guidance of at least S$0.18 payout this year.

Cable TV was star performer. Cable TV operations showed the best improvement, up 22.7% YoY and 2.3% QoQ, to contribute 18.2% of revenue (versus 16.8% in 1Q07, 17.6% in 4Q07), aided by a continued rise in ARPU from S$55 to S$57/subscriber as well as the addition of 4k new customers. Cable broadband saw a modest 6.1% YoY (+2.7% QoQ) rise in sales, despite 6k rise in subscribers; ARPU also eased from S$60 to S$59/user as more customers subscribed for its new low-price plan service. Cable EBITDA edged down from 27.4% in 1Q07 to 25.9%, dented by the higher cost of new content and customer retention.

Competition heats up in mobile segment. Mobile business saw sales rise 12.7% YoY (down 0.9% QoQ), still contributing about 51.1% of total revenue. StarHub added about 43k new subscribers, with the bulk again coming from the pre-paid segment, but the 31k new adds only brought on a 2% increase in revenue. On the other hand, the 12k new post-paid adds led to a 16% revenue rise. But mobile EBITDA fell sharply from 43.1% in 1Q07 to 36.6%, after average acquisition cost jumped 27.8% QoQ to S$124/ user, the highest since 1Q05, as StarHub moved to aggressively defend its market share ahead of the implementation of true mobile number portability (MNP) in June 2008.

Watching EBITDA margin most closely. Management is keeping to its guidance (10% revenue growth, 33% EBITDA margin, S$0.18 dividend) for this year, but EBITDA margin could come under pressure from the intense mobile competition. Nevertheless, we are keeping our FY08 estimates unchanged and our fair value remains at S$3.51. Coupled with the decent 6% dividend yield, we maintain our BUY rating.

Higher operating profit, tax adjustment boost StarHub Q1 performance

STARHUB emerged from a more competitive first quarter with net earnings 15 per cent higher at $80 million, helped by better operating profit and a one-time tax adjustment.

‘If the one-time net tax adjustment had been excluded in Q107, the Q108 profits after tax would show a 4 per cent increase year-on-year,’ said StarHub.

Diluted earnings per share was up 25 per cent at 4.67 cents and it proposed an interim dividend of 4.5 cents per share, up from 3.5 cents a year ago.

Singapore’s second largest telco said operating revenue increased 13 per cent to $535 million although margins fell as it paid more to retain and acquire customers. Operating profit rose 5 per cent to $108 million.

The group’s earnings before interest, tax, depreciation and amortisation grew 6 per cent to $168 million but margin was 33.1 per cent, down 2 points from 35 per cent. ‘Competitive intensity has heated up quite a bit,’ said Starhub chief executive Terry Clontz. He said that the firm is watching its margins closely. StarHub has guided that margins to be about 33 per cent for the full year.

StarHub said higher programming and content costs amortisation while partially mitigated by increases in subscription prices in the cable TV business continue to impact Ebitda in 2008. Further, the intensified competition in the mobile market has led to higher acquisition and retention costs for both the pre-paid and post-paid segments in Q1 2008, which further impacted the Ebitda margin.

Singapore telcos have intensified their marketing campaigns ahead of the introduction of true number mobile portability next month, when consumers will be able to switch operators effortlessly while keeping their phone numbers.

So while StarHub managed to increase mobile customers by 42,600 during the quarter to 1.8 million, its market share fell to 30.4 per cent from 31.3 per cent.

Mobile revenue grew 13 per cent to $273 million while pay TV sales jumped 23 per cent to $97 million. Broadband revenue rose 6 per cent to $64 million and fixed network sales 7 per cent to $73 million.

Free cash flow fell 78 per cent to $31 million from $140.7 million due to higher capital expenditure payments, higher prepayments, reduced trade payables and accruals in the quarter. Capital expenditure was $35 million higher at $59 million. The rise included $28 million of capex payments for projects carried over from December 2007 and paid in the beginning of this year.

CEO Kwek Buck Chye said that he expects the free cash flow to increase to over $100 million in the current quarter. StarHub expects 2008 cash capex not to exceed 12 per cent of operating revenue.