1Q14 was rather muted but results were within expectations. Maintain BUY and TP of SGD4.98. Prefer M1.

Service EBITDA margin was above full-year guidance of 32%, which StarHub maintained.

Net debt/EBITDA ratio fell to fresh 0.4x low, pointing to capacity for higher dividends in future.

Muted 1Q14 but within expectations

It was a rather muted 1Q for StarHub. QoQ performance was steady with net profit of SGD84m, up 1%. On a YoY basis, lower NBN adoption grants and a higher tax provision led to an 8% drop in net profit. On the positive side, mobile revenue rose 1.3% YoY on better postpaid contributions, fixed network revenue rose 2.2% YoY on stronger corporate business and stabilised international roaming, and EBITDA margin of 32.6% was above full-year guidance of 32%. The negatives were lower broadband and pay TV revenue due to intense competition, but this was expected.

4G price hike blocked but inevitable ARPUs will rise

StarHub tried to raise 4G premiums in mid-April by SGD2.14 a month for all its tiered subscribers but this was blocked by the IDA, which ruled that existing subscribers should not be affected until their contracts expire. But new and recontracting subscribers will still be affected. As for M1 and SingTel, we think it is just a matter of time before they follow suit and postpaid ARPUs will inevitably rise. Even with the higher 4G premium, StarHub’s postpaid plans remain competitive. For every 100k new tiered subscribers on the higher premium, we estimate a 0.1% benefit to earnings.

Maintain BUY and TP of SGD4.98. Prefer M1

While 1Q14 did not contain any surprises, we believe positive trends such as falling handset subsidies, stabilising roaming revenue and rapid data monetisation will strengthen throughout the year. In addition, net debt/EBITDA ratio fell to a fresh low of 0.4x, which will improve StarHub’s capacity to increase dividends.  

Source: Maybank Kim Eng Research - 8 May 2014