SGX Yield Stock

No surprises,but watch for capital management

FY11 results are in line, with variances of -2%and +2% to our forecast and market expectations. A 5ct DPS has been declared to a total of 20cts. AS$40m government reimbursement for achieving an NGNBN rollout milestone is expected to lower its gearing further.

Combined with lower capex and higher FCF in FY12, we are further convinced that capital management is ripe. We adjust our forecasts by 1-3% but maintain our DCF target price (WACC 8.3%). StarHub remains an Outperform and our top Singapore telco pick.

Steady ringtone

There are no surprises from the results. Postpaid ARPUs rose on the back of higher data usage as more smartphones were adopted. About 70% of postpaid users now use smartphones, up from 60% a year ago. Prepaid ARPUs declined on the back of voice/SMS cannibalisation by data messaging, even though smartphone penetration was only 30% of prepaid users (Figure 1).

Capex has peaked and StarHub expects capex/revenue to fall to 11% in FY12 from 12% in FY11, despite a S$25m spillover from FY11.

Capital management?

Lower capex and the S$40m reimbursement should cut net debt/EBITDA to 0.5x in FY12 from 0.7x in FY11 (Figure 2), reinforcing our view that the telco could pay out S$0.25/share via capital management in 2H12. Not surprisingly, Starhub downplayed such prospects, blaming the uncertain global and local economy. However, it added that it does review its capital structure quarterly.

Monetising surge in data

StarHub may reprice its data plans. There is consensus among the operators to manage data pricing upwards, consistent with our view that competition is benign. SingTel has already raised rates for its long term evolution (LTE/4G) data plan. M1 will review its pricing later in 2012 when more LTE devices become available.

Strong margins

Strong close to 2011. The feared negative impact on margins from strong iPhone 4S sales did not materialise. Even excluding capexrelated cost provisions, service EBITDA margin was in line with guidance of 30%. StarHub continued to guide for revenue growth and stable margins in 2012, and reiterated its commitment to a stable dividend. Buy with target price of $3.27 based on a 6.5% yield target.

Above expectations. StarHub brought FY11 to a strong close on outstanding performances in almost all segments, especially postpaid mobile. Although full-year net profit of $315.5m included write-backs of capex-related cost provisions, we estimate a net profit of $302m if those write-backs were excluded, in line with consensus. Also, the negative impact feared from iPhone-related subsidies did not materialise as service EBITDA margin was resilient at 30.7% (post-adjustments).

Mobile postpaid outperformed. Postpaid mobile did particularly well as StarHub gained at the high-end. Average revenue per user (ARPU) rose 4% YoY in 4Q11 on the back of an increasing mix of high-end SmartSurf plans. Residential broadband revenue held steady, with netadd of 2,000 customers despite lower ARPU as StarHub drove its hubbing proposition forward. Finally, Pay TV benefited from a commitment fee increase last August.

Margins held up despite strong iPhone 4S sales. Sales of equipment spiked 69% YoY to over 20% of sales on higher iPhone 4S sign-ups. As with M1, StarHub also reported heavy recontracts of the iPhone 4S, launched in end-October, from out-of-contract 3GS users. We expect this to start to normalise in 1Q12 and retreat further in 2Q12. However, margins held up well on lower operating costs. Even after the provision adjustment, EBITDA margin was in line with guidance.

Positive guidance. StarHub’s 2012 guidance of low single-digit growth in revenue and service EBITDA margin of 30% is virtually unchanged from 2011, highlighting management’s confidence despite the slowing economic conditions. In addition to the normal quarterly dividend of $0.05/share declared for 4Q11, management reiterated its commitment to continue its dividend stance, for another $0.20/share in 2012.

Strong margins

Strong close to 2011. The feared negative impact on margins from strong iPhone 4S sales did not materialise. Even excluding capexrelated cost provisions, service EBITDA margin was in line with guidance of 30%. StarHub continued to guide for revenue growth and stable margins in 2012, and reiterated its commitment to a stable dividend. Buy with target price of $3.27 based on a 6.5% yield target.

Above expectations. StarHub brought FY11 to a strong close on outstanding performances in almost all segments, especially postpaid mobile. Although full-year net profit of $315.5m included write-backs of capex-related cost provisions, we estimate a net profit of $302m if those write-backs were excluded, in line with consensus. Also, the negative impact feared from iPhone-related subsidies did not materialise as service EBITDA margin was resilient at 30.7% (post-adjustments).

Mobile postpaid outperformed. Postpaid mobile did particularly well as StarHub gained at the high-end. Average revenue per user (ARPU) rose 4% YoY in 4Q11 on the back of an increasing mix of high-end SmartSurf plans. Residential broadband revenue held steady, with netadd of 2,000 customers despite lower ARPU as StarHub drove its hubbing proposition forward. Finally, Pay TV benefited from a commitment fee increase last August.

Margins held up despite strong iPhone 4S sales. Sales of equipment spiked 69% YoY to over 20% of sales on higher iPhone 4S sign-ups. As with M1, StarHub also reported heavy recontracts of the iPhone 4S, launched in end-October, from out-of-contract 3GS users. We expect this to start to normalise in 1Q12 and retreat further in 2Q12. However, margins held up well on lower operating costs. Even after the provision adjustment, EBITDA margin was in line with guidance.

Positive guidance. StarHub’s 2012 guidance of low single-digit growth in revenue and service EBITDA margin of 30% is virtually unchanged from 2011, highlighting management’s confidence despite the slowing economic conditions. In addition to the normal quarterly dividend of $0.05/share declared for 4Q11, management reiterated its commitment to continue its dividend stance, for another $0.20/share in 2012.

StarHub’s Q4 net profit up 15.1% at $92.6m

Mobile business main Q4 revenue driver at $312.2m, up 3.1%

STEADY performance from its mobile and broadband businesses pushed StarHub’s net profit for 2011 to $315.5 million, up 19.9 per cent from the previous year.

The triple-play provider saw fourth-quarter net profit grow 15.1 per cent to hit $92.6 million.

Q4 and full-year operating revenues rose 9.6 per cent to $612.6 million and 3.3 per cent to $2.31 billion respectively.

Mobile revenue – still the main contributor to StarHub’s business at 51 per cent in the last quarter of 2011 – grew 3.1 per cent over the corresponding period the year before, to $312.2 million. For the year, mobile revenue was $1.22 billion, up 3.1 per cent over 2010.

One factor driving mobile revenues was increased Arpu (average revenue per user) as Singapore’s smartphone-savvy population continued to spend more on mobile services and data, said StarHub’s chief operating officer Tan Tong Hai.

He said mobile post- paid revenue grew 6 per cent, and that non-voice services contributed 39.8 per cent of Arpu for the customer segment in Q4. ‘This reflects steady growth in mobile usage.’

The company is looking to mobile services growth to bolster the segment, since the country’s subscriber base is fairly saturated at 149 per cent, so growth by absolute numbers will be slow.

Post-paid Arpu stood at $74 for the year, up from $72 in 2010. Its post-paid base was 1.06 million users, 30,000 more than the previous year.

In contrast, while StarHub added 16,000 more pre-paid customers to total 1.12 million in the segment, its Arpu continued to decline as fewer consumed mobile services. As a result, pre-paid mobile services revenue dropped 6 per cent to $249.4 million over the year.

Its second pillar of revenue, its broadband business, took in $60.6 million for the fourth quarter and $241.7 million for the year, representing a growth of 2.7 per cent and 2.4 per cent over the same periods the year before.

The company’s fixed network services revenue also rose 3 per cent to hit $88 million in the fourth quarter, and 1.5 per cent to $336.7 million for the year.

The provider, which started rolling out services on the next-generation fibre nationwide broadband network (NBN) last year, started seeing those subscriptions contributing to its data and Internet services portfolio.

StarHub CEO Neil Montefiore noted that this contribution remains low for now, as the country’s base of subscribers starts to ramp up and as infrastructure owner OpenNet continues to cover the island.

The company’s pay cable TV revenue dipped from the year before, however, since StarHub lost exclusive broadcast rights to the Barclays Premier League (BPL) to SingTel. Revenue for 2011 was $376 million, dropping $19.4 million from 2010, as the company was forced to drop its ‘sports’ content subscription price. The company also said 2010’s revenues benefited from the FIFA World Cup.

Mr Montefiore pointed out that pay-TV revenue has since stabilised, and that its number of subscribers stood at 545,000 as at Dec 31, 2011, compared with 538,000 at end-2010.

StarHub estimates it had 45.2 per cent share of the country’s pay-TV market by the end of 2011.

Renewing pay-TV content and set-top boxes contributed to a rise in capex, commented Kwek Buck Chye, StarHub’s chief financial officer.

Higher sub-contractor costs for the company’s infrastructure expansion efforts also added to capex.

The group’s operating expenses (including cost of sales) went up 1.8 per cent to hit $1.94 billion. Higher marketing and staff costs were mitigated by lower other expenses such as maintenance and operating leases. It ended the year with cash and cash equivalents of $179.2 million, and is recommending a final fourth quarter dividend of 5 cents per share. It intends to maintain its annual cash payout of 20 cents at the end of this year.

The counter closed one cent higher at $2.83 yesterday.

The telco is also one of the first to acquire a vanity top-level domain name, ‘.starhub’, and has paid US$185,000 for the privilege.