Category: StarHub
StarHub – DBS
Deteriorating market share and margins
Story: Excluding one-time tax adjustments in 1Q07, net profit grew 4% y-o-y but was 5% below our and consensus forecasts primarily due to lower margins. EBITDA margins dropped to 33.1% from 35.0% in 1Q07. As expected, StarHub declared an interim dividend of 4.5 cents per share.
Point: The lower margins in the cable TV business were in line, but the drastic drop in mobile margins was unexpected. In the pre-paid mobile space, ARPU tumbled due to an aggressive SingTel. Post-paid mobile ARPU was firm, but significantly higher equipment subsidies eroded margins. StarHub lost its mobile market share for the fourth consecutive quarter, which dropped by another 90 basis points to 30.4% sequentially.
Relevance: Ahead of full mobile number portability (MNP), we do not expect competition to ease. We maintain our earnings estimates for FY08 and FY09, which are 3.5% and 5% below the street estimates respectively. Maintain HOLD with our DCF based (WACC 6.2%, terminal growth rate 0%) target price of S$3.10.
Can management meet its guidance for 2008?
Management again guided for 10% revenue growth and 33% EBITDA margin in 2008. We believe revenue growth guidance is fair despite a healthy 13% revenue growth in 1Q08. About 50% of this revenue growth came from the mobile business, which should be flat in 2H08 y-o-y because of high post-paid ARPU base of S$78-79 in 2H07. Indeed, we are afraid that ARPU could fall if roaming revenue drop due to an economic slowdown. On the other hand, we believe there is downside risk to margin guidance (currently 33%) as 4Q margins are typically significantly lower than the rest of the year due to traditional promotions. This pulls down margins for the whole year, as in 2007.
TELCOs – DBS
Reality about Mobile Number Portability
Full mobile number portability (MNP) to go live in Singapore on 13 Jun 08. MNP would allow mobile-phone customers to switch operators without changing their numbers. This has raised investor concerns on how the competitive landscape can change in Singapore.
Experience suggests that MNP experience in Singapore should not be drastic. Almost everywhere, except Hong Kong, where MNP has been implemented, the effects of portability have been relatively minor and unnoticeable. Our analysis suggests that there are at least five reasons why MNP should not have much impact on the competitive landscape.
(1) Operators have signaled “status-quo” intentions to each other.
(2) Post-paid contracts are likely to be honoured in Singapore unlike Hong Kong.
(3) Competitive environment is less crowded than Hong Kong and Australia.
(4) A more mature market than others where MNP has taken place.
(5) No pent-up demand, as partial MNP already exists in Singapore.
Potential impact on each player should be minimal. We think that there could be negative impact on M1 due to its customers churning to other operators. For SingTel, the impact should be slightly negative to neutral while for StarHub the impact should be neutral. We maintain SingTel as our top pick for the Singapore Telecom sector.
TELCOs – CIMB
MNP goes live on 13 Jun
IDA announced yesterday that mobile number portability (MNP) will go live in Singapore on 13 Jun 08. MNP will allow mobile-phone customers to switch providers while maintaining their numbers.
This comes almost 20 months after IDA first announced its decision to roll out MNP in Singapore, in Aug 06. The June rollout date is within IDA’s latest guidance on 1 Jun 07. The date was previously scheduled for 4Q07 but was pushed back by delays in appointing the centralised database administrator.
Comments
Not expecting significant market-share shifts or spike in churns. We believe that all three mobile players had taken measures to retain their respective customers throughout 2007. This is evidenced by higher subscriber-acquisition costs (0-35% yoy) and relatively low churn rates of around 1% in 2007. Tactics included attracting valuable subscribers with generous handset subsidies for contract renewals, better IDD deals as well as bundled discounts (especially in the case of StarHub and SingTel) with other services such as broadband and pay TV. More recently, we noticed greater attempts at differentiating mobile package services with offers such as flat-rate plans, free bundled minutes/SMS and sharing minutes/SMS with family members.
Competition should remain relatively rational, with an eye on profitability and free cash flows. Competition is unlikely to break into an all-out price war but rather, on improving value propositions with greater differentiation in mobile-service plans, e.g. sharing minutes/SMS with family members, per second billing. Our view finds support in a Bloomberg article dated 16 Apr 08, which highlighted comments from Mr Quek Peck Leng (EVP of SingTel’s consumer division) that SingTel does not plan to engage in a “destructive price war” to keep its customers with the advent of MNP.
Not much downside for margins as a result of MNP. The big shift in cost structure had taken place last year when all three operators took proactive action to retain their customer base ahead of MNP. Costs will be structurally higher now but we do not expect significant downside on top of the margin adjustments observed in 2007. EBITDA margins slid 300-780bp yoy for the three players with M1 being the hardest hit, reflecting the competitive disadvantage of not providing bundled offerings with broadband and pay TV.
StarHub most likely to benefit, M1 most vulnerable in the longer term. StarHub has the smallest base of postpaid subscribers in Singapore with a market share of 27% vs. M1’s 44.6% and SingTel’s 28.4%. StarHub clearly has more to gain than lose from MNP in the longer run. We believe that M1 is the most vulnerable to losing out in the longer term due to its inability to provide bundled offerings (broadband and pay TV) which we believe are becoming more important to the buyers of telco services in Singapore.
StarHub – CIMB
Wins additional 2G spectrum rights
StarHub has successfully retained its four lots of 1800 MHz spectrum rights and won two additional lots of 2G spectrum − one lot of 1800 MHz and one lot of EGSM − in a spectrum reallocation exercise held by the IDA. Existing spectrum rights for all three mobile operators (SingTel, M1, StarHub) were originally due to expire on 30 Sep 08, but have now been extended to 31 Dec 08. The six lots of spectrum would cost StarHub a one-time fee of S$1.9m. The rights are effective from 1 Jan 09 to 31 Mar 17.
Prior to the spectrum reallocation exercise, SingTel held seven lots of spectrum (four in 1800 MHz, three in 900 MHz), M1 held six lots (four in 1800 MHz, two in 900 MHz) while StarHub held four lots (all 1800 MHz). All 17 existing spectrum lots and an additional lot of EGSM (total 18 lots) were up for reallocation. Since only the three mobile operators submitted bids, each received six lots of spectrum.
Comments
Prospects of improved coverage quality but no significant earnings impact. The win of the EGSM spectrum, which operates on 900 MHz, is positive in that it will enable StarHub to improve its mobile coverage in harder-to-serve areas such as distant military camps, hilly or forested areas and the basements of buildings, etc. due to better signal propagation properties relative to the 1800 MHz spectrum. This would improve StarHub’s mobile subscriber experience but we do not expect a significant impact on earnings. The new spectrum lots are not expected to require fundamental changes to mobile networks and the cost for spectrum had been included in management’s guidance for 2008.
Valuation and recommendation
Maintain Outperform and DCF-based target price of S$3.76 (WACC: 6.9%, growth: 1%). StarHub remains our top Singapore telco pick for its attractive CY08 yield prospect of 9.8% backed by strong free cash flow, an unrivalled triple-play proposition and exposure to telco service consumption growth in Singapore spurred by an immigration and tourism boom. Key catalysts for a sustained outperformance could include an upgrade on consensus dividend/capital return expectations which remain well below StarHub’s free cash flow prospects, steady earnings delivery (cable TV likely to surprise on the upside) and a risk-averse market environment.
M1 – BT
Montefiore earned $1.25-1.5m last year
MOBILEONE Ltd, Singapore’s smallest mobile phone company, paid chief executive officer Neil Montefiore between $1.25 million and $1.5 million in 2007.
Mr Montefiore, 55, was also given 940,000 share options last year, the company said in its latest annual report. A year earlier, he was paid a similar salary and was awarded 880,000 options.
Companies listed in Singapore are not required to disclose executives’ pay more precisely than in bands of $250,000. M1’s net income rose 4.4 per cent to $171.8 million in 2007, while sales climbed 3.9 per cent to $803.3 million.
StarHub Ltd, Singapore’s second largest phone company, paid chief executive officer Terry Clontz between $3 million and $3.25 million last year, according to its 2007 annual report. That is a decline from 2006’s $3.25 million to $3.5 million.
Mr Clontz’s pay in 2006 included a one-time so-called economic value- added ‘incentive’ due to previous years’ performance, Jeannie Ong, StarHub’s spokeswoman, said. His 2006 pay would have been between $3 million to $3.25 million without the economic value- added payment, Ms Ong said.
Mr Clontz also sold $1.4 million worth of shares in Singapore’s second largest phone company, according to a regulatory filing yesterday.
US-born Mr Clontz, sold 461,000 shares, or a 0.03 per cent stake, at an average of $3.08 each on Monday, the company said in a statement to the Singapore Exchange. The sale cuts Mr Clontz’s stake to 0.42 per cent, or about 7.2 million shares.
‘Under the US tax law, all US citizens are taxed on their full world-wide income,’ StarHub spokeswoman Jeannie Ong said in a statement. ‘Terry is planning to sell a portion of his performance shares for tax and financial planning reasons.’ – Bloomberg