StarHub (STH SP) - The New Iphone Cometh

Target Price: SGX3.06 (SELL)

• StarHub will report 2Q12 results on 8 Aug and net profit should rise 15-20% YoY to SGD90-95m, aided by better margins from lower handset subsidies, fueled by higher Android sales, as well as better seasonal contributions to topline.
• The stock's rise is a good chance to take profit, as the launch of a new iPhone soon will depress margins in 2H12. Also, yields are at historical lows and we do not expect upside in dividends given heightened capital commitments next year for BPL and 4G spectrum cost.
• The important factors to look out for are EBITDA margin, Android handset mix, pay TV content cost and management tone on dividends. Finally, do keep an eye on the Samsung/Apple legal tiff as it is likely to impact future phone prices and telco subsidies.

2Q could be all she wrote as a new iPhone looms. StarHub will report 2Q12 results on 8 Aug and earnings should rise on seasonal strength. The stock’s continued rise is a good chance to take profit, in our view, as the launch of a new iPhone in 3Q12 can be expected to depress margins in 2H12. Also, yields have been compressed to historical lows and we do not expect upside in dividends given potentially heightened capital commitments next year for BPL and 4G spectrum cost. The important factors to look out for are EBITDA margin, Android handset mix, pay TV content cost and management tone on dividends. Finally, do keep an eye on the Samsung/Apple legal tiff as it is likely to impact future phone prices and telco subsidies. SELL.

2Q12 usually the strongest quarter but iPhone coming.

Given benign competition during the quarter, we expect service revenue to grow YoY and QoQ, driven by mobile and Pay TV, which had the benefit of Euro 2012 revenue in June. Topline is expected to grow 5% YoY to ~SGD600m while net profit should rise 15-20% YoY to SGD90-95m, aided by better margins from lower subsidies, fueled by higher Android sales. However, 2H12 is expected to be hit by lower margins given the impending launch of a new iPhone.

The following are the most important numbers/factors to look out for.

1. EBITDA margin.

We expect a YoY rise on higher mix of Android handsets. 30-32% would be expected but below 30% would disappoint, not that this matters much for the rest of the year. With the rumor mill fingering a Sep 12 launch for iPhone 5, we can expect all the telcos to suffer a margin crunch in 4Q12 and 1Q13. Despite overseas telcos’ attempts to break away from the margin-killing phone subsidy model, this is unlikely to happen in Singapore for the foreseeable future.

2. Android handset mix.

Android handsets accounted for 50% of all handsets sold in 1Q12, up from 25% before. M1 said its Android mix in 2Q12 was 70% so we would not be surprised if StarHub reports a similar number. A range of 60-70% would be within expectations, while anything below 60% would be worrying. However, we think anything below 70% is unlikely as StarHub’s SmartSurf data-bundled mobile plans and MaxMobile stand-alone data plans are highly attractive.

3. Pay TV content cost.

StarHub recognised the cost of the UEFA Euro 2012 soccer tournament in 2Q12, which hopefully was sufficiently matched by subscription, advertising and sponsorship revenue. We do not expect any negative surprises as it started selling subscriptions three months ahead of the matches, and mioTV viewers would also have been able to subscribe via cross-carriage. More importantly would be any new updates on the upcoming BPL auction in Sep/Oct 2012.

4. Dividends.

While we expect 2Q12 DPS to remain at 5 cents a share and FY12 full year dividends at 20 cents a share, we would watch out for the tone of management’s commentary on future dividends. At this point, we expect the cost of BPL and 4G spectrum rights, payable next year, to reduce management’s willingness to consider raising its ordinary dividends. Management has also previously ruled out the possibility of one-off capital distribution.

Source: Maybank Kim Eng Research - 7 August 2012