The highlights of Starhub's respectable FY12 results, which met estimates, were: (i) the  lower-than-expected  dilution  in  EBITDA  from  higher  sale  of  handsets  without contracts during the quarter, and (ii) improved traction in its fixed network business. We  cut  our  FY13  earnings  forecast  by  8%  on  management's  guidance  for  lower margin,  but  raise  our  FY14  forecast  by  3%  to  reflect  better  revenue  monetisation opportunities in 2014. We raise our FV to SGD4.18 (from SGD3.40), based on a lower WACC  of  7%  (from  8%)  given  the  group's  improving  cash  position  and  on  rolling forward  our  valuation.  Maintain  NEUTRAL.  The  stock's  key  re-rating  catalyst  is  an increasing likelihood of a dividend upside surprise.   

A  good  closing.  Although  Starhub's  4QFY12  core  profit  narrowed  9%  q-o-q  (-5%  y-o-y) on  seasonally  higher  opex,  its  FY12  core  profit  (+14%  y-o-y)  of  SGD359.3m  was  in  line with  our  and  consensus  estimates,  with  a  deviation  of  4%-5%.  On  a  positive  note,  the group's  2012  EBITDA  margin  of  32.3%  trumped  its  guidance  of  30%  (vs.  our  forecast  of 31%), which management attributed to lower-than-expected handset costs in that quarter. Starhub declared a regular 5 cents/quarter DPS, bringing its YTD DPS to 20 cents/share, for a 5% yield. 

Mobile  revenue  remains  depressed.  Mobile  revenue  rose  2%  q-o-q,  reversing  from contractions in the previous three quarters, but this was largely aided by the expiration of SGD1.2m  worth  of  credits,  which  bumped  up  its  4Q12  prepaid  revenue,  alongside  the recovery  in  prepaid  net-adds.  Postpaid  revenue  inched  up  1%  q-o-q  but  fell  2%  y-o-y  as the  group  continued  to  suffer  from  weak  roaming  revenue  and  lower  MOU  from  data substitution.

Pay-TV  subs,  ARPU  down  q-o-q.  Pay-TV revenue fell 2% q-o-q due to the cessation of promotions,  leading  to  higher  subscriber  churn,  increased  competition  from  Singtel  and advertisers tightening their belts amid the uncertain macro-economic outlook. We note that the  three  consecutive  quarters  of  contraction  in  Starhub's  pay-TV  base  reflect  Singtel's aggressive  acquisition  campaigns  to  capture  subscribers  after  increasing  its  channel offerings to over 130 currently.

Special  dividend  likely  after  spectrum  auction  in  2Q2013.  Despite  its  improving  free cash flow and low net debt/EBITDA of 0.4x, Starhub remains elusive on the potential of a higher  dividend  payout  going  forward.  Management  cited  uncertainties  in  relation  to  the spending on LTE and related capex, for which it would rather use cash. We think Starhub could  loosen  its  purse  strings  after  the  spectrum  auction  in  2Q2013  as  the  group's  FCF yield is projected to rise to 8% in FY13 and 9% in FY14 from 5% in FY12.

Still  in  discussions  on  BPL.  We  gather  that  discussions  with  the  Football  Association Premier  League  (FAPL)  on  the  possibility  of  Starhub  broadcasting  the  BPL  (signed  on  a non-exclusive  basis  with  SingTel  earlier)  for  the  2013-2015  season  will  resume  after  the Chinese  New  year  festive  season.  Even  if  Starhub  failed  to  procure  the  rights,  we  see limited downside to its pay-TV franchise given that the group still offers the most compelling content genre and the fact that most pay-TV households own two set-top boxes. 

Capex  to  remain  high  in 2013. Management is guiding for capex /sales of 13% for FY13 vs 11% in FY12, mainly directed to expansion of LTE. This would imply a higher absolute capex of SGD330m vs SD273m in FY12. The guidance excludes the upcoming bid for the 1800MHz  and  2500MHz  spectra.  Based  on  the  reserve  price  of  SGD16m  for  a  2x5MHz block  of  the  1800MHz  spectrum  indicated  by  the  IDA,  Starhub  is  expected  to  fork  out  a minimum SGD64m for a 2x 20MHz block, which is optimal in order to roll out 4G coverage. 
 
New  CEO  to  take  the  helm  in  March. Starhub announced that its CEO, Neil Montefiore, will be retiring at end-February after three years (Montefiore joined Starhub from M1 where he  was  CEO).  He  will  be  succeeded  by  Tan  Tong  Hai,  the  current  COO,  who  joined  the company in 2009 with over 20 years of related experience. We view the new appointment positively as Tan has been instrumental in the group's growth over the past few years and overseen its day-to-day operations. We expect a seamless transition with Tan steering the group to greater heights going forward.  

Source: OSK