Selling pressure should ease. 3Q12 was above expectations and 4Q12 could also beat expectations as the negative impact of iPhones on margins could be fading. Also, we now take the view that lack of BPL will not be a dealbreaker while the record-low gearing should allow it to sustain dividends. We upgrade StarHub to BUY with a DDM TP of SGD3.99. There is a chance for the stock to rebound following the last few months’ selling pressure.

Above expectations. The impact of the iPhone on margins has yet to hit. But we now believe the i5’s impact may not be as bad as previous models. We understand StarHub is getting a lower unit cost from Apple. With margins running ahead of full year guidance of 30% so far (3Q12 33.9%, 9M12 32.7%), StarHub has a good chance of doing better than expected. We have raised our FY12 forecast by 8%.

Great job on cost control! Another reason for the above-expectations margin was in traffic expenses, an area that we think is more sustainable than other areas. StarHub was able to lower interconnection rates for its international outbound traffic. Depreciation, another semi-permanent cost item, was also lower than expected.

BPL not the end-all and be-all for Pay TV. StarHub is still waiting for SingTel to finalise its deal with FAPL. Nevetheless, it does expect Pay TV churn rate to rise in the next few quarters, as competition from mioTV is definitely rising. With this acknowledgement however, we now think there are ways to limit the damage. For example, StarHub has beefed up its niche content and it now also produces its own local content. It is also possible StarHub may not buy the whole package from BPL but only choose to air the key matches to save costs. Hence, even if it foregoes BPL, net subscriber loss may not exceed 5,000 in 2013, similar to 2010 when SingTel first wrested away BPL.

Record low gearing raises confidence in sustained dividend. Net debt/EBITDA fell to a record low of 0.46x in 3Q12 following its recent raising of SGD220m in medium-term notes. With more than SGD500m cash, StarHub’s annual DPS of SGD0.20 is now more assured, as well its ability to meet higher commitments ahead for BPL (if it participates) and 4G spectrum (auction next year). With lower depreciation, it may even be able to raise 2013 DPS to SGD0.22, inline with EPS.

Source: Maybank Kim Eng Research - 05 Nov 2012