SGX Yield Stock

Great start to the year! But still too pricey!

Company Overview

Starhub (STH) is the 2nd largest Telecommunications company in Singapore. The company also has a very strong PayTV franchise with subscriber base of more than 500k that is 60% larger than its closest competitor.

• Strong start with 28% increase in profits

• Stagnant subscriber acquisitions a disappointment

• Guidance maintained for DPS of 20.0cents

• Maintain Neutral with revised TP of S$2.94

What is the news?

Starhub posted a very strong set of results in the first quarter of the year with profit increase of 28% on the back of 6% growth in sales. The strong set of sales was led by higher Postpaid mobile (+6% y-y) and PayTV (+4% y-y) revenue. Starhub exhibited strong cost control for the quarter with lower marketing and promotion expenses as the key source of variance from our expectations. Starhub maintained its guidance of low single digit revenue growth and DPS of 20.0cents for the year.

How do we view this?

The results were above our expectations. However, subscriber acquisitions were slightly disappointing with relatively stagnant Mobile, PayTV & Broadband subscriber base. We think that the key source of earnings uncertainty for this year’s results would be in 2QFY12, where Starhub would likely book in significantly higher content cost for Euro 2012. Despite its low gearing with Net Debt to EBITDA of c.0.5X, management highlighted that there would be no capital management this year and maintained their guidance of 20.0cents DPS in the year.

Investment Actions?

We maintain our view that Starhub’s stock is fairly pricey at current levels and see little upside from hereon. Maintain Neutral.

Great start to the year! But still too pricey!

Company Overview

Starhub (STH) is the 2nd largest Telecommunications company in Singapore. The company also has a very strong PayTV franchise with subscriber base of more than 500k that is 60% larger than its closest competitor.

• Strong start with 28% increase in profits

• Stagnant subscriber acquisitions a disappointment

• Guidance maintained for DPS of 20.0cents

• Maintain Neutral with revised TP of S$2.94

What is the news?

Starhub posted a very strong set of results in the first quarter of the year with profit increase of 28% on the back of 6% growth in sales. The strong set of sales was led by higher Postpaid mobile (+6% y-y) and PayTV (+4% y-y) revenue. Starhub exhibited strong cost control for the quarter with lower marketing and promotion expenses as the key source of variance from our expectations. Starhub maintained its guidance of low single digit revenue growth and DPS of 20.0cents for the year.

How do we view this?

The results were above our expectations. However, subscriber acquisitions were slightly disappointing with relatively stagnant Mobile, PayTV & Broadband subscriber base. We think that the key source of earnings uncertainty for this year’s results would be in 2QFY12, where Starhub would likely book in significantly higher content cost for Euro 2012. Despite its low gearing with Net Debt to EBITDA of c.0.5X, management highlighted that there would be no capital management this year and maintained their guidance of 20.0cents DPS in the year.

Investment Actions?

We maintain our view that Starhub’s stock is fairly pricey at current levels and see little upside from hereon. Maintain Neutral.

1Q12 RESULTS SLIGHTLY AHEAD

•1Q12 results slightly ahead

•Keeps previous guidance for 2012

•No capital measures likely

1Q12 results slightly ahead

StarHub Ltd saw 1Q12 revenue climbed 5.8% YoY (but eased 3.5% QoQ) to S$590.9m, or just 2% shy of our forecast, driven by higher service revenue from all lines of business, and increased revenue from sales of equipment (+52% YoY on more sales of higher-priced smart phones and tablets). Net profit jumped 27.0% YoY (down 4.6% QoQ) to S$88.3m; while the figure was nearly 13.2% ahead of our forecast, we note that the increase came mainly from the NBN roll-out – higher adoption grants and also higher amortised income. Otherwise, operating EBITDA margin of 32.2% was in line with our forecast. And as expected, StarHub has declared a quarterly dividend of

S$0.05/share.

Maintains previous guidance

Going forward, StarHub has maintained its previous guidance for the rest of the year, citing the uncertainties brought on by the European debt crisis etc. As such, management is keeping its revenue growth guidance in the low single-digit range and expects EBITDA margin on service revenue to remain around 30%. Management also warned of potential increase in competition in 2H12, highlighting a potential rush to upgrade handsets as iPhone 4S is due for a renewal soon. Capex should also not be more than 11% of operating revenue. More importantly, the telco has kept its S$0.20/share dividend guidance for 2012; and has also ruled out any capital management moves this

year.

No change to forecasts – Maintain HOLD

As the numbers were mostly in line with our expectation, we are leaving our forecasts unchanged. We also note that the higher adoption grants and amortised income for the NBN roll-out are unlikely to be repeated in the subsequent quarters, or at least not in the same magnitude. Hence, we are also keeping our DCF-based fair value of S$3.10. Maintain HOLD. Note that the market may be slightly disappointed by the lack of capital management initiatives, given that some expectations have been built in by the recent share price outperformance.

1Q12 RESULTS SLIGHTLY AHEAD

•1Q12 results slightly ahead

•Keeps previous guidance for 2012

•No capital measures likely

1Q12 results slightly ahead

StarHub Ltd saw 1Q12 revenue climbed 5.8% YoY (but eased 3.5% QoQ) to S$590.9m, or just 2% shy of our forecast, driven by higher service revenue from all lines of business, and increased revenue from sales of equipment (+52% YoY on more sales of higher-priced smart phones and tablets). Net profit jumped 27.0% YoY (down 4.6% QoQ) to S$88.3m; while the figure was nearly 13.2% ahead of our forecast, we note that the increase came mainly from the NBN roll-out – higher adoption grants and also higher amortised income. Otherwise, operating EBITDA margin of 32.2% was in line with our forecast. And as expected, StarHub has declared a quarterly dividend of

S$0.05/share.

Maintains previous guidance

Going forward, StarHub has maintained its previous guidance for the rest of the year, citing the uncertainties brought on by the European debt crisis etc. As such, management is keeping its revenue growth guidance in the low single-digit range and expects EBITDA margin on service revenue to remain around 30%. Management also warned of potential increase in competition in 2H12, highlighting a potential rush to upgrade handsets as iPhone 4S is due for a renewal soon. Capex should also not be more than 11% of operating revenue. More importantly, the telco has kept its S$0.20/share dividend guidance for 2012; and has also ruled out any capital management moves this

year.

No change to forecasts – Maintain HOLD

As the numbers were mostly in line with our expectation, we are leaving our forecasts unchanged. We also note that the higher adoption grants and amortised income for the NBN roll-out are unlikely to be repeated in the subsequent quarters, or at least not in the same magnitude. Hence, we are also keeping our DCF-based fair value of S$3.10. Maintain HOLD. Note that the market may be slightly disappointed by the lack of capital management initiatives, given that some expectations have been built in by the recent share price outperformance.

Loosen up, please!

1Q12 core net profit beat our forecast by 4% on strong margin and low depreciation, but we consider it in line as margins may come under pressure from subsidies later this year. StarHub’s performance is 9% above consensus. It also declared a DPS of 5 cts, as expected.

Despite net debt/EBITDA falling to 0.49x from 0.65x qoq, StarHub has no plans to raise its 2012 DPS of 20 cts. We think it should loosen its dividend purse strings. We raise our DCF-based target price to reflect its lower net debt. StarHub remains an Outperform, with expectations of higher dividends being a key catalyst.

A commendable quarter

StarHub’s operational performance was broadly in line except that marketing expenses came in below expectations (Figure 1). This should normalise later in the year, especially when a new device is launched. Broadband ARPU rose for the first time (Figure 4) since its steady decline triggered by competition with SingTel. On the other hand, churns for fixed broadband and pay TV rose on customers not re-contracting after the promotions ended.

No capital management

Net debt/EBITDA fell to 0.5x, the lowest since mid-06 (Fig 3), driven partly by the regulator reimbursing S$44m (2.6cts/share) for reaching NGNBN rollout milestones. Despite the very low gearing, StarHub is maintaining its DPS of 20cts/year for FY12 and it has no plans for any capital management this year. Management acknowledges that gearing is very low but said its conservative stance hinges on competitive and economic uncertainties. We are disappointed by this and believe StarHub is overly conservative and should loosen up its dividend purse strings.

Competition to pick up

Management thinks that competition and subsidies may rise again with the launch of new devices (i.e. iPhone 5). It nevertheless expects subsidy/unit to trend down over time. StarHub noted that Android phones, which are cheaper now, make up 50% of sales with Apple making up the remaining 50% vs. 25%/75% Android/iPhone 6 months ago.