2Q13 results were slightly above expectations. Reported net profit up 16%/11% YoY/QoQ to SGD100.7m, against our expectations of SGD90-95m. Even after adjusting for SGD10m in governmentsubsidised NGNBN adoption grants, net profits would have risen almost 20% to SGD90m, driven by growth in mobile and lower handset cost. 1H13 earnings accounted for 52% of our previous FY13 forecast. EBITDA margin was especially impressive at 34.1%, due mainly to the lower handset volume despite more high-end models.

Pay TV business stabilising. What was encouraging was the stabilisation in subscriber base even without the benefit of the latest EPL cross-carriage ruling by the Government. StarHub lost 2,000 subscribers in 2Q13, but this was a big improvement from the 4,000- 5,000 loss of the past few quarters. Going forward, we expect its new EPL pricing plans, which include a SGD300 rebate for the first year, to help reverse the subscriber losses. The rebate will be funded by crosscarriage fees and no impact on financials is expected.

Weaker 2H expected. Despite a better-than-expected margin in 1H13, it could turn down in 2H13. iPhone 6 (or 5S?) is expected to be launched by October and the typically higher acquisition costs related to it may impact margins. In addition, home broadband is expected to remain highly competitive. Hence, although our full year forecast is tweaked upwards, we still expect a weaker 2H for now. Quite a bit will swing on how insanely great the iPhone 6 is.

Higher FY14 dividends beckon. Net debt/EBITDA remained low at 0.54x, albeit higher than 1Q13’s 0.45x after payment for a piece of land to site its TV transmission center. FY13 capex guidance of 13% of operating revenue was maintained. Even with this, our forecasts continue to indicate free cashflow of SGD24-25 cents in FY14-15, enough to fund a higher SGD22 cents DPS. No commitments were made but that’s to be expected as it is still too early, but with the 4G spectrum cost out of the way, we believe expectations of a dividend hike in FY14 will not be unreasonable.

Maintain HOLD. We maintain HOLD on StarHub mainly because it is trading close to our DCF valuation of SGD4.22. However, louder drumbeats for higher dividends in FY14 to get louder toward end-FY13 and support the stock at current levels.

Source: Maybank Kim Eng Research - 7 Aug 2013