Above expectations. 3Q13 net profit was SGD95.3m (-1% YoY, -5% QoQ). Excluding IDA income grant of SGD11m, organic net profit was SGD84.2m (-4% YoY, -7% QoQ), mainly due to higher staff and content costs which were offset by lower cost of handsets. However, we deem this set of results to be above expectations as EBITDA margin of 33.6% was above our expectation of 32-33% and StarHub raised its EBITDA margin guidance to 32%, which we think is still too conservative. We maintain our FY13-15F forecasts. BUY with a DCF target price of SGD5.13.

Margin guidance revised up. Service EBITDA margin of 33.6% in 3Q13, was flat YoY (3Q12: 33.9%) but down QoQ (2Q13: 33.9%). With 9M EBITDA margin trending above 33%, StarHub has revised up its margin guidance for the full year to 32%. We think this is still too low and continue to model 33% for the full year. Clearly, the iPhone did not disturb margins and we expect the same in 4Q13.

Pay TV turned the corner. StarHub added 1,000 Pay TV customers in 3Q13, its first positive net-add in two years. This underscores our expectation that its ability to cross-carry BPL, its competitive sports plans and generous rebate for soccer fans will work in its favour. StarHub emphasized that the rebate will not impact profits as it will be funded by the cross-carriage fee.

Enterprise business revving up. We note that fixed network revenue has reached 16% of revenue (+3% YoY), almost the same as Pay TV (which fell 4% but still a smaller decline than previous quarters). This is a very good sign as it shows that management’s focus on the enterprise business is working. This is a business that is not just in growth mode but also has the second highest margin after mobile.

Higher dividends still beckon. Net debt/EBITDA stayed below 0.5x. FY13 capex guidance of 13% of revenue is maintained. Even with this, our forecasts continue to indicate free cashflow of 24-25 cents a year in FY14-15, enough to fund a higher 22 cents DPS. No commitments were made but that is to be expected at this stage. We will know more by early next year.

Source: Maybank Kim Eng Research - 8 Nov 2013