SGX Yield Stock

2010 outlook still quite positive

4Q09 results were in line. StarHub Ltd reported its 4Q09 results last evening, which were mostly in line with our estimates. Revenue was up 2.5% YoY and 2.4% QoQ at S$550.0m (versus our S$546.6m estimate), driven mainly by higher equipment sales. But net profit fell 15.1% YoY and 12.8% QoQ to S$74.3m (versus our S$77.1m estimate); sharper-than-expected decline in service EBITDA margin from 32.1% in 4Q08 and 33.4% in 3Q09 to just 29.2% was the culprit – this was mainly due to the more intense festival promotions as well as the Apple iPhone 3GS launch. For the full year, revenue rose 1.1% to S$2150.0m (versus our S$2146.7m estimate), while net profit rose 2.7% to S$319.7m (versus our S$322.8m forecast). StarHub declared a quarterly dividend of S$0.05 per share as guided.

Modest iPhone boost. On a segmental basis, its mobile segment improved 3.1% YoY and 1.4% QoQ, driven by the 4% YoY and 2.3% QoQ increases in post-paid revenue; this as iPhone users typically take up higher value plans – monthly ARPU has recovered by S$1 QoQ to S$70. However, due to intense promotions for the iPhone by all three telcos, StarHub’s monthly churn rose further from 1.2% in 3Q09 to 1.3%, while acquisition cost jumped 43.2% QoQ to S$106 per subscriber. Nevertheless, management believes that things should normalize soon. While its broadband revenue fell 7.9% YoY, it was up 0.5% QoQ; this as monthly ARPU has stabilized around S$49, down just S$1 QoQ, and is also holding at the top end of StarHub’s S$45 to S$49 guidance.

2010 outlook is actually quite positive. For 2010, StarHub expects revenue to grow in the low single digit range and is guiding for service EBITDA margin to be lower around 30%. But in view of the loss of its key EPL sports and ESPN STAR Sports content from mid-2010, we note that these numbers suggest that management is actually quite confident that its other business segments will be able to make up for revenue decline in its Pay TV segment. StarHub has also maintained its S$0.05 per share quarterly dividend guidance for 2010 as expected; this despite raising its cash capex to a maximum of 14% of operating revenue (versus 12% in 2009) to cater for the NBN rollout from mid-2010.

Maintain BUY with S$2.29 fair value. Total dividend of S$0.20 translates to an attractive 9.2% yield, bringing the total return to 14.7%; as such, we maintain our BUY rating on StarHub and S$2.29 fair value.

Lower guidance, vindicates our fears

At a Glance

• 4Q09 net profit of S$74m in line with our S$75m estimate, but below consensus forecast of S$82m. DPS of 5 Scts declared, as expected.

• 2010 guidance disappointing – street likely to cut FY10F/11F by 8-10%, closer to our forecasts.

• Capex guidance raised to 14% of sales (< 11% in 2009), implying 35% yoy decline in free cash flow, in our view.

• Maintain FV with TP of S$2.06 based on 12x FY10 PER. We doubt sustainability of 20 Scts DPS from FCF, amid earnings decline.

4Q09 results below expectations. 4Q09 net profit of S$74m (-15% yoy, -13% qoq) was below expectations of S$82m due to iPhone subsidy; also evident in lower mobile EBITDA margins. Mobile market share declined slightly by 30 basis points to 27.8%.

Weak 2010 guidance; FY10F could fall 8-10% yoy. (i) Low-single digit revenue growth; (ii) 30% EBITDA margins (31.8% in 2009); (iii) Much higher depreciation to sales ratio of 13% (11.3% in 2009); (iv) Capex to sales ratio of up to 14% (10.6% in 2009). Based on the guidance, FY10F could decline 8-10% yoy. We forecast a further 4% yoy decline in 2011F due to churn in its pay TV customers spilling over to other segments.

Lower EBITDA margins reflect pricing pressure in the broadband business; iPhone subsidies and the cost of new content in order to retain pay TV customers. Higher capex stems from OpCo capex, although OpCo revenue would be negligible in 2010. Management expects to spend less than S$100m OpCo capex in three years.

Doubts over sustainability of DPS of 20cts. We forecast S$300m, down 35% yoy, of free cash flow in 2010 (despite low cash tax) and S$290m in 2011 (cash tax kick s in) compared to S$343m dividend (20 Scts) commitment. Amid declining earnings, dividends could be sustained only by raising more debt, implying weaker share price once dividends are paid out.

iPhone launch hits short-term EBITDA margin

• 4Q09 revenues up 2.5% y/y: StarHub’s reported 4Q09 revenues of S$550MM (2.5% y/y) managed to beat our estimates by 1.9%. Higher subsidy expense on IPhone sales led to a 4.2 percentage point decline in EBITDA margin to 29.2%. Thus, EBITDA at S$152 MM (-7.9% y/y) missed our forecasts by 8.5%. Net profit at S$74MM fell 10.6% short of our estimates. StarHub added 25k wireless subs in 4Q09 versus 2k disconnections in 3Q09. Mobile and pay TV ARPU at S$50/S$56 remained stable sequentially, while broadband ARPU declined by 2% to S$49. StarHub declared a final dividend of 5 cents per share, implying a total payout ratio of 109% in 2009. StarHub remains one of our top dividend picks in the region.

• Minor earnings revisions and S$2.30 price target unchanged. We have revised 2010E revenues by 1.6%, driven primarily by a 2.3% revision to our wireless revenue forecast. Short-term pressure on margins has resulted in a 1.4% and 2.3% cut in EBITDA and net profit. Capex has been revised by +1.3% due to higher sales. The combined effect is a small 1.1% decrease in our DCF value to S$2.28. Our December 2010 DCF–based price target is unchanged at S$2.30.

• 5.0 cents per share quarterly dividend guidance intact: With higher cash flows and low net debt/EBITDA at 1.0x, StarHub remains confident of paying out at least 5 cents per share quarterly. Management guidance is for low single digit revenue growth in 2010 while EBITDA is expected to be around 30% of service revenues. Cash capex is expected to remain below 14% of revenues.

• Key risks: Further decline in EBITDA margins, a cut in dividend payout, and greater-than-expected competition post NBN are the key risks to our price target.

StarHub’s Q4 profit dips 15%

Broadband revenue down 8% while other 3 segments post sales increases

LOWER revenue from its broadband arm and higher cost of sales dragged StarHub’s fourth-quarter net profit down 15.1 per cent to $74.2 million.

Earnings per share for the quarter ended Dec 31, 2009, was 4.33 cents, compared with 5.11 cents in Q4 2008.

Q4 group revenue rose marginally by 2.5 per cent to $550 million, from $536.7 million.

‘I think it’s a reasonable set of results given the economic climate in Singapore (last year),’ said Neil Montefiore, StarHub’s newly-minted CEO.

The former chief of MobileOne took over from former StarHub helmsman Terry Clontz at the start of this year after he returned to the United States.

As with the previous quarter, Singapore’s second-largest telco is rewarding shareholders with a dividend of five cents per share for Q4, 0.5 cent more than the payouts for the first two quarters of 2009.

This brings its full-year dividend payout to 19 cents per share, higher than the 18 cents it paid in 2008 when the global economy took a drastic turn.

StarHub’s net profit for fiscal year 2009 rose 2.7 per cent to $319.7 million on the back of 1.1 per cent improvement in sales to $2.15 billion.

Full-year earnings per share came in at 18.68 cents, up from 18.28 cents in 2008.

The operator’s fourth-quarter profitability was dented by a 20.2 per cent increase in cost of sales to $230.3 million as a result of higher equipment and services costs.

An increase in handset subsidies due to the launch of Apple’s coveted iPhone in December and festive promotions were cited as the key reasons for the spike.

‘Typically with phones sold in Singapore, we see a payback in two to six months. That is the case with the iPhone,’ Mr Montefiore said at the results briefing yesterday.

Sales rose across three out of StarHub’s four business segments in Q4, with its broadband unit being the lone exception.

The company’s mobile business, which accounts for around half its sales, rose 3.1 per cent in the fourth quarter to $280.6 million.

StarHub’s mobile customer base climbed 8.6 per cent year-on-year to 1.92 million in Q4, thanks largely to the allure of the iPhone and other mobile promotions.

Pay-TV sales edged up 2.1 per cent in Q4 to $102.6 million and the much-feared customer defection in this segment did not materialise.

StarHub added 4,000 more cable television customers in Q4 despite having lost the English Premier League (EPL) broadcast rights for the next three seasons to arch-rival SingTel, ending the year with a tally of 539,000 customers. It previously said 10 per cent of its cable TV customer base could defect to the red camp as a result of the EPL loss.

Revenue from the operator’s fixed network business also rose 1.6 per cent in Q4 to $78.8 million.

However, these improvements were offset by an 8 per cent dip in its cable broadband sales during the period to $59.1 million as consumers continue to opt for lower-end plans and subscription discounts.

Looking ahead to the rest of the year, StarHub expects to grow its 2010 operating revenue in the low single-digit range, and Ebitda (earnings before interest, tax, depreciation and amortisation) margin on service revenue is seen at around 30 per cent.

The firm expects its cash capital expenditure to increase this year but it will not be more than 14 per cent of full-year operating revenue.

This is because of the projected investments that will be sunk into Singapore’s upcoming fibre-optic network by its new subsidiary Nucleus Connect.

This StarHub unit was formed last year after the telco clinched the government tender for operating and reselling bandwidth on the country’s new ultra-fast broadband highway.

The good news for shareholders is that StarHub intends to keep its quarterly dividend payout at five cents or more per share in spite of the higher capital outlay.

Besides preserving its dividend yield in 2010, the company’s new steward also intends to leave the operations of StarHub unchanged. ‘I will not be making any changes. It’s a well-run company,’ Mr Montefiore said.

StarHub shares closed unchanged at $2.17 before the earnings were released.

Below expectations: guidance for 2010E mixed; revenue slowdown

What surprised us

Starhub (STH) reported 4Q09 service revenue, EBITDA and net profit of S$521 mn, S$152 mn, S$74 mn: +1%, -7%, -14% yoy and 0%, -7%, -6% vs GSe. Key deviation from our estimates is on mobile SAC as STH introduced iPhone in December. Positives: a) sub adds pickup – broadband, cable TV and post-paid mobile adds all improved sequentially, the latter due to iPhone; b) churns remain manageable – pay TV churn is roughly flat qoq and broadband churn has fallen qoq, despite rivals getting more aggressive on both access and pay TV ahead of the NBN launch. Negatives: a) accelerating declines in broadband revenue – 4Q09 revenue was -8% yoy vs -3%/-6% for 2Q09/3Q09, due to ARPU declines; b) fixed network revenue trends also weakened, to +2% yoy vs +6-8% yoy the prior three quarters. We do not view higher SAC from iPhone as a negative necessarily as mgmt believes payback period is 2-6 months in Singapore and subscriber quality will improve, but would look for validation on returns in terms of ARPU /revenue pickup in coming quarters. Guidance for 2010E: 1) revenue growth of low single digit (vs I/B/E/S est flattish); 2) service margin of 30% (excl equip and Opco grant) (slightly lower than consensus of 31%); 3) capex not to exceed 14% (vs prior guidance/consensus of 13%); 4) S$0.05 DPS/quarter (unchanged).

What to do with the stock

We think STH faces meaningful operational headwinds/risks from NBN and pay TV and earnings/CF visibility is reduced. But, we believe 9% yield provides downside support. We prefer Mobile One (M1) in Sing telco space for its similar valuation/yield but offensive position / potential for mobile/NBN revenue share gains. We revised STH earnings by -13%/+15%/+13% in ’10E/11E/12E mainly to reflect iPhone/NBN upfront cost in ’10E and back-loaded benefits starting from 2011E. 12-m DCF TP is S$2.15 (from S$2.13). Still Neutral. Risks: Downside: broadband/pay TV share loss; Upside: b-t-e sub retention post NBN launch and EPL loss.