Downgrade to SELL. Admittedly, this is a risky call amidst the current liquidity and yield compression conditions, but we had held on to our BUY call with the highest TP on the Street even when the stock exceeded all expectations. Now the dividend spread is getting ever thinner, competition is heating up, revenue guidance cut and demands on cash are growing more onerous. While gearing is ultra-low, the nearest window for more dividends has now been pushed back with a delay in the 4G spectrum auction toward 2H13. The fixed dividend and yield of 4% will still provide some comfort and prevent an immediate rush to the exit, but we would still advise clients to sell into strength. Our DCF-derived TP is SGD4.20 (prev SGD4.31).

Below expectations. Quite a number of surprisingly weak numbers in 1Q13 results. Adjusted for grants given by IDA to drive NGNBN adoption (arguably not operating income as it will not last), net profit would have FALLEN 5% to SGD76m instead of RISEN 3% to the SGD91m “headline” number. Mobile revenue was also surprisingly weak (-1.5% YoY); it suggests a structural change toward Wifi by outbound travellers and explains why M1 started a Wifi roaming service last month. This is a big concern as roaming is a high margin business.

Competition heating up. StarHub continued to lose Pay TV market share to mioTV. ARPU rose a dollar but that is scant comfort against the continued loss of market share. IDA has dished out a setback against SingTel on subjecting BPL to cross-carriage rules but SingTel is unlikely to let up on its drive to beef up content and gain subscribers. Further, fixed broadband subscribers have been flat for the last five quarters while ARPU declined further on competition from smaller retail players such as MyRepublic. In other words, competition is unlikely to let up but would intensify even more in 2013.

No room for error. StarHub has cut full year revenue guidance from “single digit” to “low single digit” and kept EBITDA margin forecast at 31% (despite doing 33% in 1Q13 due to lesser handset subsidy pressure now that iPhone mania is well and truly over), which is a warning that management expects competition ahead to impact topline and margins. Yes, 1Q13 margin was above-expectations at 33%, but staying at this level will depend on whether manufacturers will launch more expensive premium handsets, something that is not in its control.

Source: Maybank Kim Eng Research - 10 May 2013