Starhub

Kim Eng on 7 May 2012

Maintain BUY. 1Q12 results were above expectations, with net profit of SGD88.4m (+28% YoY, +12% QoQ on adjusted basis) above our forecast of SGD85m. As expected, EBITDA margin rebounded to 32.2%. While we maintain our full year forecasts, we note that management guidance contains a high level of conservatism, especially  where its full year EBITDA margin of 30% of concerned. Also, while StarHub maintained its dividend guidance of SGD0.20 this year, the low low gearing of 0.5x net debt to EBITDA without a pressing cash commitment is a glaring statistic that demands more action from management. We maintain BUY with target price of SGD3.50 (based on average 5.7% yield of top 15 dividend stocks).

Above expectations. Net profit rose 28% YoY to SGD88.4m, or 12% QoQ from an adjusted SGD79m in 4Q11. This is above our forecast of SGD85m, driven by a higher-than-expected EBITDA margin rebound to 32.2% and lower-than-expected operating expenses, in particular marketing & promotional costs and depreciation. On the topline, service revenue growth of 3.5% was driven by the mobile business (more subscribers on higher value plans) and higher Pay TV ARPU.

Low gearing demands action. Free cashflow jumped to SGD104m from SGD29m in 4Q11 as capex fell from 21% of service revenue to 7.5%. This pushed net debt/EBITDA from 0.7x in 4Q11 to 0.5x, the lowest since 2006/07. While full year capex is expected to be higher at 11% of revenue, our end-FY12F net debt/EBITDA forecast of 0.7x already reflect this. With no big cash contingency, StarHub should really raise its full year dividend. While management reviews its policy every quarter, for now it has stuck to its regular SGD0.20/share dividend.

EBITDA margin guidance sounds conservative. Starhub maintained guidance of low single digit revenue growth and 30% EBITDA margin. Management is being conservative as it expects Apple’s iPhone 5 to be launched later this year, and higher subsidies could affect margins. However, we believe this to be a source of potential upside. Interestingly, management revealed that iPhones and Android phones are now evenly split, compared to 75% iPhone six months ago.