SGX Yield Stock

2Q10 missed but focus on the sustainable dividends

2Q10 missed DBe but maintain Buy for the sustainable yield

STH reported S$58m 2Q10 NPAT (-25% YoY), below Consensus and DBe’s S$65m, as EBITDA margin recovered slower than we expected. But revenues grew 7% YoY to a new high of S$569m and were slightly ahead of DBe (S$547m) and we believe STH’s margins and overall performance will continue to improve into 2H10e. Importantly, the 6.4c/share FCF was robust (128% of the 5c/share 2Q10 dividend) and continues to underpin STH’s long-term dividend sustainability – a key reason we still like STH and maintain Buy.

2Q10 revenues at a new high and 1H10 revenues trending in-line

2Q10 total revenues +7% YoY to S$569m and were slightly ahead of our expectations (S$547m) on strong mobile and cable TV revenue growth. Specifically, mobile revenues jumped 8% YoY to S$294m on increased IDD & roaming and data usage while 2Q10 cable TV revenues were boosted by the FIFA World Cup 2010 broadcast and rose strongly 9% YoY (excluding this, 2Q10 cable TV revenues would have been stable YoY). Elsewhere, 2Q10 fixed revenues +2% YoY, handset revenues +26% YoY (continued robust smartphone take-up) while broadband revenues fell 2% YoY (ARPU decline on subscriber dilution). Overall, 1H10 revenues reached S$1,127m and represented 51% of DB10e (S$2,195m).

But 2Q10 EBITDA margin recovered slower than expected

2Q10 opex rose 16% YoY to S$429m as increased smartphone take-up drove cost of equipment sold up 65% YoY while 2Q10 cost of services grew 21% YoY on higher costs related to the World Cup 2010 broadcast. As such, despite sequential margin improvement, the 2Q10 EBITDA margin was 5.5% pts lower YoY at 24.8% and below our expectations (26.5%) while 2Q10 EBITDA missed our estimate slightly (by 3%) and was down 12% YoY to S$141m. But management continues to expect sequential margin improvement over the course of 2010e and the previous EBITDA margin guidance (28% on service revenues) was maintained.

DCF-derived S$2.62 TP; key risks include content costs and competition

Our valuation is based on DCF using 7.2% WACC (2.8% risk free rate, 4.7% equity risk premium and 5% cost of debt) and 0% g to reflect the long-term growth potential of the Singapore telco market. Our TP implies a 7.6% yield. Key risks include content costs and competition.

2Q FY10: largely in line; earnings visibility remains poor

● StarHub’s 2Q FY10 operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn) while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively).

● Looking ahead, management maintained its full-year revenue growth guidance at low single digit and EBITDA margin at 28%. The company also maintained its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividend is sustainable. Taking the view that margins in 2H would improve, we fine tune our FY11/12E EPS by 1%.

● We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.

2Q results largely in line with our expectations

StarHub reported 2Q10 results on 5 August. Its operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn)

while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively). The 7% YoY growth in overall revenue was driven by a 10% rise in post-paid mobile revenue and a 9% rise in pay-TV revenue. The former was due to the growth in its post-paid subscriber base to 994,000 (from 910,000 in 2Q FY09). However, with COGS surging 26% YoY to S$251 mn, 2Q EBITDA fell 12% YoY (to S$141 mn) and 2Q net profit contracted 25% (to S$58 mn). In addition to a 65% YoY jump in cost of equipment (to S$81 mn), cost of services rose 21% YoY, as a result of higher pay-TV content costs during the period.

Higher mobile data usage offsets lower voice usage

While non-voice usage expanded further (to 34.6% of post-paid ARPU from 30.5% a year ago), voice minutes continued to fall (-12% YoY). As such, ARPU improved just 1% to S$70 (from S$69 during the same period last year). This supports our view that growth in data usage should help offset the decline in voice ARPU, rather than boost overall mobile ARPU. As highlighted in our Asia telecoms sector report, Smartphones – a welcome revenue boost, published on 2 February 2010, we expect overall Singapore mobile revenue to achieve a CAGR of 2% between 2009 and 2015. The corresponding growth rates for voice and data revenue are -4% and 19%, respectively. Driven by higher smartphone sales, acquisition costs per sub rose 38% YoY to S$109 (but fell 11% from S$122 in 1Q10). StarHub added 28,000 post-paid (1Q: 27,000) and 53,000 pre-paid (1Q: 30,000) subs during the quarter.

Looking ahead, management maintained full-year revenue growth guidance at low single digit (in view of the potential impact from the loss of Barclay’s Premier League broadcasting rights on pay-TV subs and the launch of the New Generation National Broadband Network in 3Q10) and EBITDA margin at 28% (versus 30% in 2009). StarHub is also maintaining its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividends is sustainable. StarHub’s 1H revenue and EBITDA accounted for 51% and 45% of our full-year forecasts, respectively. Taking the view that margins in 2H would improve, we marginally fine tune our full-year forecasts.

Maintain UNDERPERFORM

We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.

2Q FY10: largely in line; earnings visibility remains poor

● StarHub’s 2Q FY10 operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn) while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively).

● Looking ahead, management maintained its full-year revenue growth guidance at low single digit and EBITDA margin at 28%. The company also maintained its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividend is sustainable. Taking the view that margins in 2H would improve, we fine tune our FY11/12E EPS by 1%.

● We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.

2Q results largely in line with our expectations

StarHub reported 2Q10 results on 5 August. Its operating performance was largely in line with our expectations. 2Q revenue of S$569 mn (+7% YoY) was 2% above our forecast (of S$556 mn)

while EBITDA of S$141 mn and net profit of S$58 mn were 4% above our expectations (of S$135 mn and S$56 mn, respectively). The 7% YoY growth in overall revenue was driven by a 10% rise in post-paid mobile revenue and a 9% rise in pay-TV revenue. The former was due to the growth in its post-paid subscriber base to 994,000 (from 910,000 in 2Q FY09). However, with COGS surging 26% YoY to S$251 mn, 2Q EBITDA fell 12% YoY (to S$141 mn) and 2Q net profit contracted 25% (to S$58 mn). In addition to a 65% YoY jump in cost of equipment (to S$81 mn), cost of services rose 21% YoY, as a result of higher pay-TV content costs during the period.

Higher mobile data usage offsets lower voice usage

While non-voice usage expanded further (to 34.6% of post-paid ARPU from 30.5% a year ago), voice minutes continued to fall (-12% YoY). As such, ARPU improved just 1% to S$70 (from S$69 during the same period last year). This supports our view that growth in data usage should help offset the decline in voice ARPU, rather than boost overall mobile ARPU. As highlighted in our Asia telecoms sector report, Smartphones – a welcome revenue boost, published on 2 February 2010, we expect overall Singapore mobile revenue to achieve a CAGR of 2% between 2009 and 2015. The corresponding growth rates for voice and data revenue are -4% and 19%, respectively. Driven by higher smartphone sales, acquisition costs per sub rose 38% YoY to S$109 (but fell 11% from S$122 in 1Q10). StarHub added 28,000 post-paid (1Q: 27,000) and 53,000 pre-paid (1Q: 30,000) subs during the quarter.

Looking ahead, management maintained full-year revenue growth guidance at low single digit (in view of the potential impact from the loss of Barclay’s Premier League broadcasting rights on pay-TV subs and the launch of the New Generation National Broadband Network in 3Q10) and EBITDA margin at 28% (versus 30% in 2009). StarHub is also maintaining its minimum dividend of S¢5 per quarter for FY10 and management reiterated that the current level of dividends is sustainable. StarHub’s 1H revenue and EBITDA accounted for 51% and 45% of our full-year forecasts, respectively. Taking the view that margins in 2H would improve, we marginally fine tune our full-year forecasts.

Maintain UNDERPERFORM

We maintain our view that the company’s earnings visibility will continue to be impacted by the more intense competitive landscape. Notwithstanding the attractive dividend yield of 8.6% for FY10 and the stock’s recent underperformance, we maintain our UNDERPERFORM rating. Our DCF-based target price of S$2.05 implies 12% potential downside from current levels.

Q210 results disappoint; Retain Sell rating

• Margin recovery in Q210 less than expected

iPhone launch dragged down StarHub’s earnings in Q1 and we had expected earnings to recover in Q2 as iPhone sales slows. While net profit did jump from S$42mn in Q1 to S$58mn in Q2, it was well below our expectation of S$72mn and Bloomberg consensus of S$69mn.

• Weak subscriber trend for pay TV and broadband

Postpaid was the bright spot in Q2 as StarHub recorded wireless postpaid net adds of 29,000 and postpaid revenue increased 10% YoY and 4% QoQ. But for broadband and pay TV, StarHub recorded zero net adds in Q2 (Table 2). Churn rate for broadband increased to 1.6% from 1.2% in Q1 and churn rate for pay TV increased to 1.2% from 0.9% in Q1.

• Further challenges in H210

In H210, we expect StarHub’s wireless profits to be pressured again as iPhone 4 was launched in July. And we expect market share to be pressured as on the pay TV side StarHub has lost BPL content to SingTel and on the broadband side there will be new entrants through NBN.

• Valuation: Retain Sell rating and S$2.05 price target

The 8.6% dividend yield is the only support for StarHub share price, in our view. However, we recommend the Taiwan telcos over StarHub for investors seeking defensive dividends in Asia. Reflecting weaker than expected Q2 results, we cut 2010/11/12 EPS forecast to S$0.144/0.172/0.174 from S$0.156/0.172/0.175, respectively. Our price target is based on DCF using 7.8% WACC and 0% ‘g’.

Q210 results disappoint; Retain Sell rating

• Margin recovery in Q210 less than expected

iPhone launch dragged down StarHub’s earnings in Q1 and we had expected earnings to recover in Q2 as iPhone sales slows. While net profit did jump from S$42mn in Q1 to S$58mn in Q2, it was well below our expectation of S$72mn and Bloomberg consensus of S$69mn.

• Weak subscriber trend for pay TV and broadband

Postpaid was the bright spot in Q2 as StarHub recorded wireless postpaid net adds of 29,000 and postpaid revenue increased 10% YoY and 4% QoQ. But for broadband and pay TV, StarHub recorded zero net adds in Q2 (Table 2). Churn rate for broadband increased to 1.6% from 1.2% in Q1 and churn rate for pay TV increased to 1.2% from 0.9% in Q1.

• Further challenges in H210

In H210, we expect StarHub’s wireless profits to be pressured again as iPhone 4 was launched in July. And we expect market share to be pressured as on the pay TV side StarHub has lost BPL content to SingTel and on the broadband side there will be new entrants through NBN.

• Valuation: Retain Sell rating and S$2.05 price target

The 8.6% dividend yield is the only support for StarHub share price, in our view. However, we recommend the Taiwan telcos over StarHub for investors seeking defensive dividends in Asia. Reflecting weaker than expected Q2 results, we cut 2010/11/12 EPS forecast to S$0.144/0.172/0.174 from S$0.156/0.172/0.175, respectively. Our price target is based on DCF using 7.8% WACC and 0% ‘g’.