Citigroup, Aug 2

GOOD value but limited short-term catalysts: 2Q results and commentary reaffirms our view that the stock lacks immediate catalysts. That said, we think investors with a 12-18 month view should look to accumulate at these levels as cable TV tariff hike-driven profit upside and another capital management effort are catalysts in waiting into 2008. The assured 5.6 per cent yield limits downside risk.

Modestly softer 2Q results: Ebitda of S$164 million (+13 per cent year-on- year) in line but with S$5.3 million in one-time inter-carrier settlement credits. Net profit of S$80.8 million (+7 per cent year-on-year) was lower than our S$86 million estimate on higher (deferred) taxes. Lower mobile margins were the primary reason for lower-than-expected Ebitda.

Subdued margin guidance for 2H: The management flagged higher costs into 2H as the primary reason to maintaining 34 per cent service Ebitda margin guidance for the year (despite 35.4 per cent for 1H). The ‘high-single digit’ revenue guidance for the year is clearly conservative though, given 10.4 per cent growth in 1H and that cable TV tariff hikes kick in effective 2H – we have raised our topline expectations.

Changing estimates: Revenue estimates are up 1-2 per cent for 2007 and 2008 – still conservative, we think, as we attempt to bake in the cable TV tariff hikes. There is minimal change to Ebitda estimates as we factor in higher content costs. The 9 per cent cut in net profit estimates for 2007 primarily reflects a higher effective tax rate – all of this is deferred tax and does not impact cash flows though.

Higher DPS commitment of 15.5 cents for 2007: Versus 14 cents guidance earlier, this reflects a strong FCF profile, implying a sound 5.6 per cent yield.

BUY

Delivers on promise

Comment on Results
Starhub reported a net profit of S$80.8m, up 7% y-o-y and 15.4% q-o-q. Excluding the impact of higher tax rate, the results are broadly in line with our estimate of S$83m. Starhub has proposed a 4 cents interim dividend and raised its full year dividend guidance to a minimum of 15.5 cents from 14 cents earlier.

Broadband segment was the top performer in revenues. Revenue grew 10.8% y-o-y with broadband revenue registering the fastest growth of 15.6%. Overall service EBITDA margin of 35.3% is better than 34.4% last year. While there was an improvement in EBITDA margins in all the three segments, margins for mobile business improved significantly by 3 ppt to 43.2% because of (1) focus on higher margin, pre-paid service that lowered overall customer acquisition costs (2) efforts on retention of high-value post-paid customers with higher minutes of usage (MoU), even at the cost of market share.

Outlook
In our view, StarHub is well on track to surpass its official guidance of “high single digit revenue growth” and “service EBITDA margin around 34%” for the full year. We have slightly trimmed down our earnings estimates for FY07 and FY08 by 3% each to factor higher tax rate of 21% up from 18% assumed earlier.

Expect a stable 3Q07 to be followed by a strong 4Q07. Pay TV would be the weakest link in 3Q07 as amortisation of EPL content cost would kick-in, eroding the pay TV margins. The projected increase of S$4 in monthly fee of basic channels would not be sufficient to cover the higher cost of content. A hike of S$10 in monthly fee for sports channels would come into effect in 4Q07, thus helping to sustain the margins. We suspect, with more advertising revenue, StarHub would be able to stem the decline in pay TV margins in the next 6-9 months.

Recommendation
Maintain BUY at our DCF-based (WACC 7%, terminal growth rate 1%) 12-month target price of S$3.45.

Unclear picture on National Broadband Network (NBN). The request for proposal (RFP) for NBN should be out in 3Q07 and IDA is expected to award the project towards the end of 2007. StarHub is one of the 12 bidders, who have been prequalified by IDA. It will take another 3-5 years to build the high-speed network and the operator would need to provide access to the network at regulated prices to other service providers. In our view, despite government subsidy, the project cost would be substantial with a long break-even period. Moreover, a completely new network could introduce excess broadband capacity in the island, eroding profitability of all the players. Alternatively existing networks could be upgraded to provide high-speed broadband service rather than building a new network from scratch. IDA’s decision would be important in this regard.

Ups dividend payout

Decent 2Q07 results. StarHub Ltd (STH) reported a decent set of 2Q07 results. Revenue grew by about 10.1% YoY and 3.5% QoQ to S$489m. On the other hand, net profit rose 6.8% YoY and over 15.6% QoQ to S$80.8m. The reason for the sequential bottom-line strength was due to a low base effect in 1Q07 as the result of the recognition of deferred tax liability of S12.1m. A more reflective line would be at the pre-tax level and in that context it grew by about 12.2% YoY and 5.4% QoQ, broadly in line with top-line growth. In terms of EBITDA, it grew by 12.7% YoY and 3.8% QoQ to S$163.7m, again in line with revenue growth. More importantly, EBITDA margins improved QoQ from 35% to 35.3%. All segments did well with revenue improving at low single digit sequentially. Going forward, STH is guiding for a high single digit revenue growth with full year margin at 34%, implying more competitive pressures in 2H07. Finally, STH is revising up its quarterly dividend from 3.5 cents to 4.0 cents, implying FY07 dividend of 15.5 cents or an attractive yield of 5.6%.

Emphasis on higher value post paid. Mobile division continues to dominate group revenue contribution, making up 55% of total revenue in 2Q07. Post paid in turn contributed to over 74% of mobile revenue and is the more important segment. Over the last quarter, subscribers increased 48,000 QoQ to 1.63m. The bulk of which came from pre paid with post paid seeing a decline of 2,000. The reason for this was due to STH’s strategy to target higher end post-paid customers. This move appeared to have worked with slightly lower post-paid subscribers but with higher ARPU usage leading to higher overall revenue.

Broadband enjoyed increase in subscribers. This segment continued to enjoy low single digit sequential growth in subscriber numbers. About 5,000 new customers were added and at ARPU of about S$60/mth (flat QoQ). This in turn led to revenue growth of about 3% QoQ to S$62.1m.

Maintain BUY. We see STH as defensive, with steady albeit moderate growth, but with attractive dividend. STH has revised dividend policy from 3.5 cents to 4.0 cents per quarter. As such, FY07 and FY08 dividend will be at least 15.5 cents and 16.0 cents, respectively, giving yields of about 5.6% and 5.8%. In terms of rating and valuation, we maintain our S$3.24 fair value and BUY rating.

StarHub Q2 profit up 6.8% to $80.8m

It intends to pay minimum dividend of 15.5 cents per share for this year

STARHUB’s net profit rose 6.8 per cent year-on-year to $80.8 million for the second quarter as it continued to add new customers amid fierce competition. For the three months ended June 30, 2007, earnings per share rose to 4.48 cents from 3.53.

The telco declared a second-quarter dividend of four cents a share, and intends to pay a minimum annual cash dividend of 15.5 cents per share for financial year 2007.

StarHub’s Ebitda – earnings before interest, tax, depreciation and amortisation – rose 13 per cent to $163.7 million, while Ebitda margin on service revenue was up 0.9 point to 35.3 per cent. Group operating revenue rose 10.1 per cent to $489.1 million.

On a half-year basis, net profit was up 10 per cent at $150.7 million, while turnover rose 10.4 per cent to $961.8 million.

In the second-quarter, mobile revenue was up 12 per cent to $252.9 million, while mobile customer base expanded 19 per cent to 1.63 million.

StarHub has maintained its cable TV sales at $81.7 million, even though there was no World Cup revenue this year. This was achieved with the cable TV customer base growing 4 per cent to 496,000, registering a household penetration of 44.1 per cent compared with 42.8 per cent a year ago. StarHub said it is committed to delivering more value to customers.

‘The recent unveiling of our HubStation, HSPA services and BPL ‘live’ broadcasts over cable TV, mobile, and broadband are taking hubbing to the next level. We will continue enhancing our customers’ lifestyles by offering them the most innovative services with more choices, value and convenience,’ said chief executive officer Terry Clontz.

StarHub has renewed its rights to English football’s Premier League for another three years at a much higher cost, and earlier announced that it will pass on some of that cost to viewers.

In the second quarter, its broadband revenue rose 16 per cent to $62.1 million, while broadband subscription-based customers jumped 12 per cent to 334,000 customers at the end of the quarter.

Sales from fixed network grew 11 per cent to $66.5 million, due mainly to the higher margin data & Internet services, which was driven by demand for its domestic and international lease circuits’ services.

For the full-year, the company expects revenue to post high single-digit growth, and Ebitda margin on service revenue to be around 34 per cent.