Towards Financial Freedom
StarHub - Ringing Up Stronger Results
StarHub's results beat our and consensus expectations due to the higher NGN adoption grant and steady margins. Management lifted its FY13 EBITDA margin by 1ppt to 32%, implying a softer festive-driven 4Q13. We raise our FY13/FY14 forecasts by 8-11%, mainly to reflect a larger adoption grant and lower traffic cost. These push up our DCFbased FV to SGD4.55 vs SGD4.18 (WACC: 7%, TG: 1.5%). Maintain NEUTRAL, as valuations are not undemanding.
- Trumping expectations. StarHub's annualised 9MFY13 core earnings (+3% y-o-y) made up 88%/78% of our/consensus forecasts respectively, mainly due to a higher next-generation network (NGN) adoption grant and sustained EBITDA margins. Broadband and pay-TV revenue dipped 1% and 4% respectively, although these were partially offset by higher fixed network (+3%) and mobile (+1%) revenue. Q-o-q, service revenue fell 1% on weaker roaming revenue.
- BPL makes a comeback. After six quarters of contraction, StarHub drew 2k pay-TV subs in 3Q13 as it benefitted from the cross carriage of the Barclay's Premier League (BPL) over to its platform and the introduction of a new high security set-top box (STB) to curb equipment piracy. As a goodwill gesture, it isoffering a SGD30/mth rebate (up to SGD600) to customers taking up its bundled pay-TV service, which is more attractive than its competitor's standalone BPL package.
- Guidance.Management lifts FY13 EBITDA margin guidance to 32% from 31%, while overall revenue growth is likely to come in below FY12. The margin guidance incorporatesthe BPL rebate, which StarHUb expects to be EBITDA-neutral given thatit receives a carriage fee from SingTel.
- Raising DCF-based FV to SGD4.55.We raise our FY13/FY14 forecasts by 8-11% mainly to factor in a higher NGN grant and lower traffic cost. StarHub remains a NEUTRAL as the stock's valuations are at the high end of its historical trading range. We think there is a strong likelihood of a special dividend given its under-leveraged balance sheet. The key risks to our forecast are: i) weaker-than-expected margins, and ii) stronger-than-expected service revenue growth.
Other Takeaways From 3Q13 Results Call
Roaming revenue weaker. Mobile revenue dipped 2% q-o-q on weaker outbound roaming revenue as subscribers opted for Wifi or purchase a local SIM card when abroad. Excluding the roaming impact, mobile revenue would have been flat. To mitigate the structural weakness in roaming revenue, StarHub introduced Roam Easy which offers a single roaming rate for data on any mobile network at over 20 popular destinations overseas.
Roaming revenue weaker. Mobile revenue dipped 2% q-o-q on weaker outbound roaming revenue as subscribers opted for Wifi or purchase a local SIM card when abroad. Excluding the roaming impact, mobile revenue would have been flat. To mitigate the structural weakness in roaming revenue, StarHub introduced Roam Easy which offers a single roaming rate for data on any mobile network at over 20 popular destinations overseas.
Broadband ARPU decline likely to have been arrested. StarHub expects broadband ARPU to bottom out soon after experiencing significant erosion over the past 12 months due to stiff competition and price discounting among operators. More on tiered 4G data plans. Management revealed that 38% of its postpaid subs are on the tiered 4G/data plans. This is a sharp increase from 32% in 2Q13 and 16% in 4Q12, allowing for better monetisation of data. Although it did not reveal the percentage of tiered data subscribers exceeding the monthly caps, this was likely to be on par with its peers'.
Capital management. Although management remains non-committal, we think there is a strong likelihood that StarHub may increase its dividend payout given that its net debt/EBITDA is at a multi-year low of 0.5x. Assuming a target net debt/EBITDA of 1x,
there is scope for an additional 23 cents/share to be returned to shareholders, on top of its recurring 20 cents/share annualpayout (5 cents/share per quarter)
there is scope for an additional 23 cents/share to be returned to shareholders, on top of its recurring 20 cents/share annualpayout (5 cents/share per quarter)
Financial Exhibits
- There is capital management potential for StarHub, given its net debt/EBITDA of 0.5x.
SWOT Analysis
Company Profile
Starhub is Singapore's second-largest telecommunications company offering quadruple play services.
Starhub is Singapore's second-largest telecommunications company offering quadruple play services.
Recommendation Chart
Source: OSK
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