Category: StarHub
StarHub – OCBC
Domestic play with minimal earnings risks
Defending its turf. StarHub recently reported an impressive 3Q07 results with a 16% YoY increase in 3Q revenue to S$460.6m and with net profit up 25% YoY to S$81.4m. EBITDA improved 22% YoY to S$156.6m due to slower cost escalation, and this led to margin expansion to 35.7%. All business units did well, registering double-digit revenue growth. StarHub managed this despite the onslaught from its much bigger rival in almost all its business segments.
Mobile continues to dominate. On the mobile front, StarHub continued to grow with revenue up 11% YoY to S$233.7m in 3Q. Sequentially, subscriber growth was 3.0% and revenue growth was 5.3%, implying OEM of 1.75x. This is even more remarkable as growth came from the price sensitive prepaid segment and despite SingTel’s aggressive strategy to capture market share. Going into 2008, with the introduction of number portability, we expect competition to become more intense. However, if StarHub remains disciplined in its focus on profitability (as opposed to market share), it is likely to continue to deliver growth.
Cable TV to see stiff competition. In 2008, we anticipate SingTel to ramp up its promotion of Mio TV to try to capture market share. However, until SingTel improves on its content offerings, StarHub is likely to reign supreme in this area. As for margins, the recent revision of rates should arrest any decline post the EPL rights.
Upgrade to BUY on low earnings risks. Starhub’s investment case remains its domestic exposure and its ability to continue to provide growth from a mature market via innovative marketing strategies such as its bundling of services also known as Hubbing. Furthermore, even in the face of the onslaught from SingTel to garner pre-paid market share, StarHub remains steadfast and somehow has managed to balance subscribers’ growth with revenue growth to provide OEM of over 1.5x. Even on the pay-TV space, it continues to reign supreme and we do not see SingTel’s Mio as likely to threaten its supremacy in content in the short to medium term. Since our downgrade to HOLD in early Nov, StarHub has corrected by about 4%. At present trading range, we see meaningful upside. This together with a dividend of 16 cents (5.3% yield) and the fact that it is a pure Singapore play make StarHub an attractive alternative and safer proposition. We thus upgrade StarHub to BUY with a revised fair value of S$3.41.
TELCOs – OCBC
2008 likely to be challenging year
Key drivers in 2008. Looking into 2008, Singapore’s telco sector is likely to face some issues. This includes S$ appreciation vis-à-vis other currencies, stock market volatility, nationalistic sentiment against sovereign company/fund investment, higher inflation rates. Against this uncertain climate, our stock selection criterion is defensiveness in earnings. We prefer telcos with pure Singapore exposure, high earnings visibility, high dividend payout and with a non-aggressive growth strategy.
Number portability encourages switching. Mobile Number Portability (MNP) will be introduced in 2008, and this is likely to be preceded by intensive competition to lock in existing and new customers. There is some evidence that aggressive marketing has already started, and this is reflected in some telcos’ willingness to sacrifice revenue growth at the expense of subscribers. Our OIR’s Economic Matrix shows this clearly. With anticipated competition, there is likely to be margin erosion. However, depending on the individual telcos growth strategy some could be affected more than others.
NBN: Does return justify investment? 2008 will see the bidding for the National Broadband Network (NBN). Investment in the NBN network is expected to run into the billions and its tariff charges are likely to be heavily regulated. The return is unlikely to be very high, as it is on a competitive bid basis, tariff charges are likely to be regulated, and return may not commensurate with the high investment costs.
StarHub reigns supreme in pay-TV market. In 2007, SingTel entered the Pay-TV arena with Mio TV. However, we do not see the take-up rate to be high and this perhaps explains SingTel’s promotion to offer free Mio TV with its broadband packages. We see Mio TV to need to revamp its content and differentiate itself to tap onto undiscovered demand to compete in the Pay-TV market.
StarHub and M1 our top picks for 2008. As we move into 2008, telcos are likely to face a challenging environment on both the macro and micro fronts. Our stock selection criterion is thus defensiveness in earnings. In that context, our preferred telcos are StarHub and MobileOne (M1).
TELCOs – CIMB
A less bumpy ride on the way up
• 3QCY07 results in line, Singapore telco service consumption growth intact. Earnings for the three telcos came within our expectations. The key positive was robust 9.5% yoy revenue growth for the sector, driven by mobile and broadband, which both grew 12% yoy. The key negative was margin pressure due to unique factors at SingTel (strategic initiatives and increased contributions from low-margin IT sales) and StarHub (lag in passing on higher BPL costs). Overall, Singapore’s telco service consumption growth remains intact on the back of an immigration boom and a robust domestic economy.
• Positive outlook for 2008. The migration boom and the fastest rise in wages in seven years provide a promising backdrop for telco services for 2008. In addition, we expect wireless broadband and 3G services to provide upside to growth expectations on greater availability and affordability of user-friendly 3G handsets as well as the introduction of service innovations such as capped data plans. Margins in 2007 hit a low and we expect improvements in 2008. However, the scope of margin expansion should be capped by structurally higher retention costs with mobile number portability (especially at SingTel) and no let-up in intense but rational competition.
• StarHub and SingTel should be the biggest winners. Although all three telcos should benefit from subscriber growth, StarHub stands out for its potential ARPU growth (postpaid mobile and pay TV) while SingTel should be driven by mobile subscriber market-share gains. StarHub’s best-in-class bundled offerings make it the best stock to own for telco service consumption growth in 2008. We expect M1 to be increasingly marginalised for lack of bundling capability.
• Robust free cash flow yields supportive of above-consensus prospective yields. We reiterate our view that there is significant scope for consensus to re-rate dividend expectations for the Singapore telco sector. We expect the sector to deliver an average CY08 dividend yield of 8.4% (consensus: 6.0%), fully backed by free cash flow from robust topline growth, limited capex and strong balance sheets.
• Maintain Overweight; StarHub our top pick, followed by SingTel. Singapore telcos offer attractive risk-reward in terms of historical EV/EBITDA valuations. The sector also offers reliable earnings from an immigration influx, the proliferation of 3G/wireless services etc. Finally, downside risks should be limited given hefty prospective yields on robust free cash flow. Key risks are irrational competition and NBN but these are on the low side. StarHub is our top pick for its bundled offerings and greatest scope for upside surprises on the ARPU front. SingTel is our next preferred pick for prospective subscriber market-share gains in Singapore and exposure to high-growth regional markets.
StarHub – Phillip
Q3 FY07 Results
3Q results. StarHub reported 3Q operating revenue of S$513.1m (+11.4% yoy) and net profit of S$81.3m (-0.2% yoy). Moreover, EBITDA increased to S$164.1m (+4.8% yoy). It also declared an interim dividend of S$0.04 per ordinary share, which was significantly higher than the interim dividend of S$0.03 last year.
On a half-year basis, operating revenue of S$1,474.9m was 10.8% better yoy while 1H06 net profit of S$232.0m was 6.2% higher.
Performances of the various business units. StarHub reported strong growth in its business units: mobile revenue was S$266.2m (+13.9% yoy), cable TV revenue was S$85.8m (+8.5% yoy), broadband revenue was S$62.0m (+11.7% yoy), fixed network service revenue was S$73.4m (+3.9% yoy) and sale of equipment was S$25.7m (+18.7% yoy). As at 30 September 2007, the number of customers for its mobile, cable TV, broadband businesses were 1,683,000, 499,000 and 338,000 respectively.
However, total operating expenses increased to S$405.4m (+13.4% yoy). This was due mainly to the amortisation of the costs for the new season of Barclay Premier League programming rights.
FY 2007 Outlook. StarHub expects continued growth in its operating revenue and will pay a minimum annual cash dividend of 15.5 cents per ordinary share for 2007. This amounts to a dividend yield of 5.0 percent for 2007 based on its previous close price of S$3.12.
HOLD recommendation, target price at S$3.16. StarHub remains attractive as a dividend play although its operations are focused on the Singapore market. In view of the recent rise in share price, we have a HOLD recommendation on the stock due to limited upside. We are maintaining the fair value at S$3.16.
StarHub – CIMB
Mobile power
• Within expectations; high-quality revenue growth. 3Q07 earnings of S$81m (-0.1% yoy) is about 4% above our estimate and 9% above consensus. As expected, earnings were driven by solid revenue growth (+11.4% yoy). EBITDA margins, which declined to 32% from 34% due to a timing lag between the repricing of sports packages (starting October) and the booking of BPL costs (started in August), are within our expectations. Overall, this was a strong quarter for StarHub. Accordingly, management raised its FY07 revenue guidance to 11% growth from “high single digits”.
• Mobile powered the 11.4% topline growth. While prepaid led growth (+21% yoy) on strong subscriber growth (+29% yoy), postpaid was the star. Postpaid ARPU rose 10% yoy to S$78 as StarHub enjoyed a successful MaxMobile (wireless broadband) launch, captured higher-ARPU subscribers as well as increased IDD and roaming fees during the quarter.
• Our EBITDA margin assumption remains intact. EBITDA margins hit a low this quarter on account of the timing lag in the repricing of higher BPL content cost and as StarHub spent more on acquiring higher-ARPU postpaid subscribers. Our EBITDA margins have accounted for higher customer acquisition costs in 4Q07.
• Key revenue growth catalysts remain: 1) increased roaming from robust regional economies and MaxMobile driving postpaid ARPU; 2) a foreign-worker influx driving prepaid mobile; and 3) strengthened product offering and sportschannel repricing driving cable TV growth. We believe cable TV has the greatest scope to surprise.
• Maintain Outperform; target price nudged up to S$3.66 from S$3.64. Our target, still based on DCF valuation (6.9% WACC; 1% terminal growth rate), has been nudged up after we upgraded our FY07-09 earnings estimates by 1-3% to reflect stronger mobile growth. We continue to believe StarHub offers the best exposure to Singapore’s telco service consumption boom as the leading quadruple-offering operator. It remains our top Singapore telco pick over a 12 month horizon.