Category: StarHub
StarHub – CIMB
Concerns are lifting
• Concerns are lifting. StarHub’s range-bound share price over the past 12 months reflected swelling concerns on potential risks from SingTel’s mioTV threat, mobile number portability (MNP) and Next-Generation Broadband Network (NGNBN). We are seeing signs that this wall of worry is receding, setting the stage for sustained share price advance.
• Cable TV could surprise to the upside in 2008. StarHub has beefed up its cable TV offerings in 2H07 to spur both subscriber growth and take-up of add-on packages in 2008. We also believe that the impending launch of Video on Demand (VOD) in 2H08 is likely to benefit from pent-up pay-per-view demand for StarHub’s unrivalled content library. Sports Group re-pricing which only took effect from October 2007 also provides tailwind to 2008 revenue growth.
• Scope remains for upgrades to consensus dividend expectations. Consensus is expecting CY08 yield of 5.9%, based on StarHub’s commitment to a minimum DPS of 18 cts. We expect consensus estimates to creep towards our CY08 DPS of 30 cts (9.8% yield), mostly funded by free cashflow. Our view is supported by StarHub’s end-07 capital structure of 1.3x net debt/EBITDA which is below the 1.8x target.
• Reiterate Outperform with unchanged DCF-based target price of S$3.76 (WACC: 6.9%, growth: 1%). StarHub remains our top pick for the Singapore telco sector. We like StarHub for its exposure to the telco services consumption growth spurred by Singapore’s rise as a key global city, its unrivalled triple-play proposition and robust 9.8% yield prospects backed mostly by free cash flow.
Telecoms – CIMB
Robust fundamentals remain underappreciated
• 2007 review: StarHub led EBITDA growth; SingTel gained subscriber share; M1 fell behind. All three telcos benefited as sector revenue growth accelerated to 9% yoy (2006: 7% yoy) on the back of a growing population and rising ARPU from higher usage of telco services. However, sector margins were compressed as SingTel took advantage of the strong demand to pursue market share aggressively. StarHub leveraged its triple-play proposition to deliver the strongest EBITDA growth of 12% yoy. SingTel was the biggest winner of mobile subscriber market share but its EBITDA was flat yoy while M1’s EBITDA declined 3% yoy as its pure-play mobile proposition continued to be marginalised by competitors’ bundled offerings.
• 2008: topline growth with stable margins. We expect population growth and rising ARPU to drive sector topline further (+8% yoy) in FY08. SingTel is expected to keep competition keen in its pursuit of further subscriber share but competition is unlikely to escalate very much from here. Margins should be relatively flat yoy in 2008 as telco operators focus on cost-efficiency gains to offset incremental subscriber acquisition costs. We expect StarHub to post the strongest EBITDA growth of 12% yoy again in 2008 on the back of ARPU growth.
• Attractive yield support from robust free cash flow. Singapore telcos are generating robust free cash flow and remain below their capital-structure targets. We believe there is flexibility to return the entire free cash flows to shareholders while keeping sufficient ammunition for strategic investments. We expect the sector to deliver an average yield of 7.4% for 2008 with StarHub offering the highest prospective yield of 10%, funded mostly by free cash flow. This should be followed by M1 and SingTel with prospective yields of 8% and 4.5% respectively.
• Mobile number portability (MNP) and Next Generation National Broadband Network (NGNBN) are unlikely to worsen competition. Downside risk from MNP is limited as industry players had taken the necessary steps to defend their subscriber base through the most of 2007, as reflected in higher subscriber acquisition costs. We also believe that NGNBN is unlikely to induce margineroding competition, based on our analysis of NGNBN’s business model, the government’s objectives and incumbents’ competitive advantages.
• Maintain Overweight with StarHub as our top pick, followed by SingTel. We expect telcos to continue to outperform the STI in view of an extended period of market risk aversion. StarHub offers ARPU-driven EBITDA growth potential combined with strong capital-return potential. We have above-consensus dividend/capital return expectations of 10% for StarHub. SingTel offers liquid exposure to reliable earnings growth from blue-chip regional associates and a decent yield of 4.5%. Potential news flow on bids for Vietnam’s telco assets in 2H08 could provide share-price catalysts. M1 remains a highly defensive yield stock with prospective yields of 8% but lacks catalysts.
StarHub – OCBC
Eyes 10% revenue growth in FY08
Good 4Q07 results. StarHub Ltd posted a good set of 4Q07 results, with revenue up 13.9% YoY and 5.0% QoQ to S$538.8m, aided by good performance from all its business units. Although net profit fell 30.5% YoY (+21.0% QoQ) to S$98.4m, we note that the year-ago quarter was boosted by S$57.6m tax credit versus S$6.7m in 4Q07 (none in 3Q07). It was also ahead of our forecast of S$81.4m and the consensus of S$81.9m. Looking at the pre-tax level, earnings were actually up 9.4% YoY, although it was down 9.2% QoQ. However, we are not surprised by the sequential drop as StarHub typically incurs higher acquisition cost (S$97/connection versus S$92 in 3Q07) in the last quarter. As a result, EBITDA margin also slipped from 33.7% in 3Q07 to 31.2%.
For the full year, revenue grew by a decent 11.6% to S$2,014m, though shy of our S$2,100m estimate, net profit of S$330.4m (down 8.3%) was about 5.4% higher than our estimate. StarHub also declared a final dividend of S$0.045/share (versus S$0.035 in 4Q06), bringing the total dividend for the year to S$0.16 (versus S$0.115 in FY06).
Mobile continues to drive growth. On a segmental basis, its mobile business continues to dominate, contributing around 51.2% of total revenue in 4Q07, up 14.4% YoY and 3.5% QoQ. On the subscriber front, StarHub managed to add some 74,000 new customers, but as the bulk came from the pre-paid segment, EBITDA margin eased to 35% from 40.8% in 3Q07. We note that it was also partly due to the seasonal factor as well as pricier handsets as acquisition cost rose to S$97, up from S$92 in 3Q07. Also worth mentioning, its cable TV business showed a 19.9% YoY and 10.7% QoQ increase to contribute 17.6% of total revenue, aided by a rise in ARPU to S$55, up from S$51 in 3Q07, following an increase in the Sports Group subscription fee in the quarter.
FY08 growth to remain at 10%. For FY08, management remains confident that it can sustain revenue growth at 10%, and hold EBITDA margin on service revenue at about 33%. It also aims to pay a minimum cash dividend of S$0.18/share, or around S$0.045 per quarter. In line with the latest guidance, we have adjusted our FY08 estimates by around 4% higher. Again, we see StarHub as a good defensive stock, backed by an attractive dividend policy, hence we maintain our BUY rating with a revised fair value of S$3.51.
StarHub – Phillip
Strong Results; Excellent Dividend Play
4Q and full-year results. StarHub reported 4Q operating revenue of S$538.8m (+13.9% yoy) and net profit of S$98.3m (-30.6% yoy). Moreover, EBITDA increased to S$157.4m (+7.8% yoy). It also declared a final dividend of S$0.045 per ordinary share, which was higher than the final dividend of S$0.035 last year. This brought the total annual dividend to S$0.16 (+39.1% yoy) per ordinary share for 2007 that was significantly higher than the total annual dividend of S$0.115 for 2006.
On a full-year basis, operating revenue of S$2,013.7m was 11.6% better yoy. However, net profit of S$330.3min 2007 was 8.3% lower yoy because it was boosted by a tax credit of S$20.0m while the net profit of S$360.2m in 2006 was due to a higher tax credit of S$77.2m. If the tax credits were excluded, net profit in 2007 would be at S$310.3m, which would be an increase of S$27.3m (+9.6% yoy) from S$283.0m in 2006
Performances of the various business units. StarHub reported strong growth in its business units: mobile revenue was S$1,037.2m (+12.8% yoy), cable TV revenue was S$341.8m (+9.1% yoy), broadband revenue was S$246.9m (+12.3% yoy), fixed network service revenue was S$279.9m (+7.9% yoy) and sale of equipment was S$107.9m (+15.9% yoy). As at 31 December 2007, the number of customers for its mobile, cable TV, broadband businesses were 1,757,000, 504,000 and 346,000 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%.
HOLD recommendation, target price raised from S$3.16 to S$3.30. StarHub has reported better-than-expected financial results. It is also attractive as a dividend play although its operations are focused on the Singapore market. As a result, we are raising the fair value to S$3.30. Nevertheless, we are maintaining our hold recommendation on the stock due to limited upside in the share price.
StarHub – DBS
Results & guidance lag expectations
Story: 4Q07 core net profit of S$71.0m (up10% y-o-y, down 13% q-o-q) was below our and consensus expectations of S$80m. A tax credit of S$27m resulted in net profit of S$98.3m. Besides management declared a final dividend of 4.5 cents bringing total dividend to 16 cents and guided for 4.5cents dividend every quarter.
Point: 4Q07 EBITDA margins were below expectations and FY07 EBITDA margins at 33.7% missed management guidance of around 34%. On outlook, management has guided for EBITDA margins of 33% and revenue growth of 10%. It is the first time that management has guided for lower EBITDA margins.
Relevance: Management guidance is inline with our FY08 earning estimates, which are 5% below the consensus estimates. StarHub trades at over 16x FY08 earnings, which is higher than SingTel’s valuation of 15x, despite StarHub’s lower growth prospects and long term risk from NBN. Maintain HOLD with DCF based (WACC 7%, terminal growth rate 1%) target price of S$3.10 with attractive 6% dividend yield. Although the company has potential for capital management at Net Debt to EBITDA ratio of 1.3x compared to a target of 1.5x-2.0x, management ruled it out in the first half of FY08.
High increase in equipment cost came as a surprise. Operating costs were higher than our expectations mainly due to (1) 71% y-oy increase in cost of sophisticated mobile and set-top boxes, which are getting more expensive and require more subsidies. (2) 71% yo-y increase service cost due to higher cost of content.
Market share loss continues for 3rd consecutive quarter. Mobile market share declined by 200 basis points y-o-y and 60 basis points q-o-q to 31.3%. Similarly for cable TV and broadband segments, despite higher equipment subsidies, subscriber growth has significantly slowed down compared to last year due to market saturation.