You are on page 1of 5

Singapore Company Focus

StarHub
Bloomberg: STH SP | Reuters: STAR.SI

DBS Group Research . Equity 7 May 2010

FULLY VALUED S$2.27 STI : 2,839.65 iPhone obsession?


Price Target : 12-Month S$ 2.06
Reason for Report : 4Q09/FY09 results • Excluding one-off costs, core profit of S$55m (-33%
Potential Catalyst: Quarterly dividends y-o-y) came in 20% below market expectations

Analyst
• StarHub subsidized too many iPhones and content
Sachin Mittal +65 6398 7950 costs spiked up further
sachin@dbsvickers.com • Management revised down its FY10F margin
guidance; we cut FY10F/11F earnings by 7%/2%
• 125% dividend payout ratio is unsustainable in our
view; Recommend FULLY VALUED
Price Relative
S$
High cost was the negative surprise. The major
R e la tiv e In d e x

3 .4 0
3 .2 0
207

187
disappointments were (i) high equipment cost of S$94m
3 .0 0
2 .8 0 167 (+92% y-o-y, +17% q-o-q), as StarHub subsidized more
2 .6 0
2 .4 0
147 phones than other players. Many of them could be re-
2 .2 0
127

107
contract customers and are not reflected in its 27K new
2 .0 0
1 .8 0 87 postpaid mobile customers; (ii) content costs were high at
1 .6 0
2006 2007 2008 2009 2010
67
S$88m (+6% y-o-y, q-o-q) as StarHub acquired new content.
S ta rH u b (LH S) R e la tive S T I IN D EX (R H S )
We understand that the regulator is investigating if pay TV
operators rushed into locking exclusive content just before
the effective date of cross-carriage measure. There was also
Forecasts and Valuation an unexpected one-off S$12m staff bonus expense. Besides
these, free cash flow was healthy at S$122m due to S$49m
FY Dec (S$ m) 2009A 2010F 2011F 2012F
increase in payables and low capex of only S$49m (normal
Turnover 2,150 2,222 2,209 2,229 S$75m) due to the timing issue.
EBITDA 654 627 635 644
Pre-tax Profit 385 329 333 337
Net Profit 320 273 276 279 Subsequent quarters should improve, but we still cut
Net Pft (Pre Ex.) 320 273 276 279 FY10F/11F numbers. Management revised down FY10F
EPS (S cts) 18.6 15.9 16.1 16.3 service EBITDA margin guidance to 28% (from 30%) on
EPS Pre Ex. (S cts) 18.6 15.9 16.1 16.3 higher-than-expected iPhone sales. As we expect iPhone
EPS Gth Pre Ex (%) 1 (15) 1 1
investments to benefit StarHub in 2H10F, we cut our FY10F
Diluted EPS (S cts) 18.6 15.9 16.1 16.3
Net DPS (S cts) 18.4 18.6 16.1 16.3 service EBITDA margin assumption to 29.6% from 31.6%.
BV Per Share (S cts) 7.0 4.5 2.0 2.2 But following the anticipated sharp 14% decline in FY10F
PE (X) 12.2 14.3 14.1 13.9 earnings, profits might stabilize in FY11F. As such, we apply
PE Pre Ex. (X) 12.2 14.3 14.1 13.9 13x FY10F PER multiple (similar to M1) to derive a S$2.06
P/Cash Flow (X) 6.9 7.1 7.0 6.9 target price for StarHub. Also, given competitive threats and
EV/EBITDA (X) 7.0 7.4 7.3 7.2
Net Div Yield (%) 8.1 8.2 7.1 7.2
higher capex requirements, sustainable dividend payout ratio
P/Book Value (X) 32.4 50.5 111.7 102.1 should be between 80%-100% compared to effective125%
Net Debt/Equity (X) 5.7 9.4 21.7 19.1 now in our view.
ROAE (%) 278.1 276.7 493.0 765.3

Earnings Rev (%): (6.0) (2.6) N/A At A Glance


Consensus EPS (S cts): 17.0 17.8 19.1 Issued Capital (m shrs) 1,714
Mkt. Cap (S$m/US$m) 3,892 / 2,774
ICB Industry : Telecommunications Major Shareholders
ICB Sector: Mobile Telecommunications Asia Mobile Holdings (%) 49.0
Principal Business: Spore-based integrated information,
Nippon Telegraph (%) 10.0
communications and entertainment company, providing a broad
Mediacorp (%) 7.5
range of mobile, cable TV, broadband and f
Source of all data: Company, DBS Vickers, Bloomberg Free Float (%) 33.5
Avg. Daily Vol.(‘000) 2,359

www.dbsvickers.com
Refer to important disclosures at the end of this report
ed: SGC / sa: JC
Company Focus
StarHub

Starhub: Result Summary and Operating Data


FYE Dec (S$m) Q1 2009 Q4 2009 Q1 2010 Chg Chg
y-o-y q-o-q
Profit & Loss
Op. revenue 530.6 550.0 557.2 5.0% 1.3%
Op. expenses (423.1) (460.3) (499.5) 18.1% 8.5%
Op. profit/ (loss) 107.1 89.2 57.7 -46.1% -35.3%
EBITDA 167.9 152.0 118.4 -29.5% -22.2%
EBITDA margins % 33.0 29.0 22.5
Interest income 0.2 0.4 0.3 50.0% -25.0%
Interest expense -6.2 -6 -6 -3.2% 0.0%
PBT 101.4 83.6 52.5 -48.2% -37.2%
Tax -18.9 -9.3 -9.8 -48.1% 5.4%
PAT 82.5 74.2 42.7 -48.2% -42.5%

Segmental Revenue
Mobile 264.7 280.6 286.3 8.2% 2.0%
Cable 102.0 102.6 101.6 -0.4% -1.0%
Broadband 62.4 59.1 59.5 -4.6% 0.7%
Fixed 79.1 78.8 79.9 1.0% 1.4%
Total Service 508.2 521.1 527.3 3.8% 1.2%
Equipment 22.4 28.9 29.8 33.0% 3.1%
Total revenue 530.6 550.0 557.2 5.0% 1.3%

Operating Data
Mobile
Post- paid revenue 200.4 216.1 220.2 9.9% 1.9%
Pre- paid revenue 64.3 64.1 66 2.6% 3.0%
Total revenue 264.3 280.6 286.3 8.3% 2.0%
Post- paid subscribers 901 939 966 7.2% 2.9%
Pre- paid subscribers 914 979 1009 10.4% 3.1%
Total subscribers 1815 1918 1975 8.8% 3.0%
Post- paid MOUs 442 407 387 -12.4% -4.9%
Pre- paid MOUs 547 566 559 2.2% -1.2%
Post- paid ARPU 67 70 69 3.0% -1.4%
Pre- paid ARPU 24.0 23.0 23.0 -4.2% 0.0%
Subscriber Acquisition Cost (S$) 77.0 106.0 122.0 58.4% 15.1%
Average Monthly Churn rate 1.00% 1.30% 1.20% 20.0% -7.7%
Singapore Mobile penetration 131.7% 136.6% 137.6% 4.5% 0.7%
Market Share 28.3% 27.8% 28.4%
Cable TV
Residential Cable TV customers 527 539 541 2.7% 0.4%
ARPU (S$) 58 56 55 -5.2% -1.8%
Average Monthly Churn rate 1.0% 1.0% 0.9%
Broadband
Residential Broadband customers 383 400 408 6.5% 2.0%
ARPU (S$) 55 49 48 -12.7% -2.0%
Average Monthly Churn rate 1.10% 1.10% 1.20% 9.1% 9.1%
Source: Company, DBS Vickers

Page 2
Company Focus
StarHub

Income Statement (S$ m) Balance Sheet (S$ m)


FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F

Turnover 2,150 2,222 2,209 2,229 Net Fixed Assets 883 908 895 860
Other Opng (Exp)/Inc 0 0 0 0 Invts in Associates & JVs 0 0 0 0
Operating Profit 408 352 356 360 Other LT Assets 356 356 356 356
Other Non Opg (Exp)/Inc 0 0 0 0 Cash & ST Invts 232 186 157 184
Associates & JV Inc 0 0 0 0 Inventory 18 19 18 19
Net Interest (Exp)/Inc (23) (23) (23) (23) Debtors 107 139 138 139
Exceptional Gain/(Loss) 0 0 0 0 Other Current Assets 132 132 132 132
Pre-tax Profit 385 329 333 337 Total Assets 1,728 1,740 1,696 1,690
Tax (65) (56) (57) (57)
Minority Interest 0 0 0 0 ST Debt 219 219 219 219
Preference Dividend 0 0 0 0 Other Current Liab 658 647 646 637
Net Profit 320 273 276 279 LT Debt 694 694 694 694
Net Profit before Except. 320 273 276 279 Other LT Liabilities 37 103 103 103
EBITDA 654 627 635 644 Shareholder’s Equity 120 77 35 38
Minority Interests 0 0 0 0
Sales Gth (%) 0.8 3.4 (0.6) 0.9 Total Cap. & Liab. 1,728 1,740 1,696 1,691
EBITDA Gth (%) 0.9 (4.1) 1.3 1.5
Opg Profit Gth (%) (1.1) (13.7) 1.0 1.0 Non-Cash Wkg. Capital (400) (358) (357) (347)
Net Profit Gth (%) 1.2 (14.5) 1.0 1.2 Net Cash/(Debt) (681) (727) (756) (729)
Effective Tax Rate (%) 17.0 17.0 17.0 17.0
Cash Flow Statement (S$ m) Rates & Ratio
FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F

Pre-Tax Profit 385 329 333 337 Opg Profit Margin (%) 19.0 15.9 16.1 16.1
Dep. & Amort. 245 274 279 284 Net Profit Margin (%) 14.9 12.3 12.5 12.5
Tax Paid (6) 0 (56) (57) ROAE (%) 278.1 276.7 493.0 765.3
Assoc. & JV Inc/(loss) 0 0 0 0 ROA (%) 18.9 15.8 16.1 16.5
Chg in Wkg.Cap. 35 (33) (1) (11) ROCE (%) 31.6 27.1 27.6 28.4
Other Operating CF 32 0 0 0 Div Payout Ratio (%) 99.0 116.5 100.0 100.0
Net Operating CF 692 571 554 554 Net Interest Cover (x) 17.7 15.2 15.3 15.6
Capital Exp.(net) (232) (300) (265) (250) Asset Turnover (x) 1.3 1.3 1.3 1.3
Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 20.4 20.2 22.9 22.7
Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 92.5 87.7 88.6 86.6
Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 4.4 4.2 4.3 4.3
Other Investing CF 0 0 0 0 Current Ratio (x) 0.6 0.5 0.5 0.6
Net Investing CF (232) (300) (265) (250) Quick Ratio (x) 0.4 0.4 0.3 0.4
Div Paid (309) (316) (318) (276) Net Debt/Equity (X) 5.7 9.4 21.7 19.1
Chg in Gross Debt 0 0 0 0 Net Debt/Equity ex MI (X) 5.7 9.4 21.7 19.1
Capital Issues 0 0 0 0 Capex to Debt (%) 25.4 32.9 29.0 27.4
Other Financing CF (46) 0 0 0 Z-Score (X) 3.6 3.5 3.0 2.9
Net Financing CF (355) (316) (318) (276) N. Cash/(Debt)PS (S cts) (39.7) (42.4) (44.1) (42.5)
Net Cashflow 106 (46) (29) 28 Opg CFPS (S cts) 38.3 35.2 32.4 32.9
Free CFPS (S cts) 26.8 15.8 16.8 17.7

Quarterly / Interim Income Statement (S$ m) Segmental Breakdown / Key Assumptions


FY Dec 1Q2009 2Q2009 3Q2009 4Q2009 FY Dec 2009A 2010F 2011F 2012F

Turnover 531 532 537 550 Revenues (S$ m)


Other Oper. (Exp)/Inc (60) (61) (61) (63) Mobile 1,094 1,184 1,208 1,223
Operating Profit 108 101 111 90 Cable TV 405 381 339 335
Other Non Opg (Exp)/Inc 0 0 0 0 Broadband 241 224 204 196
Associates & JV Inc 0 0 0 0 Fixed Network 317 338 361 377
Net Interest (Exp)/Inc (6) (6) (6) (6) Others 92 96 97 98
Exceptional Gain/(Loss) 0 0 0 0 Total 2,150 2,222 2,209 2,229
Pre-tax Profit 102 95 106 84 EBITDA (S$ m)
Tax (19) (17) (20) (9) Mobile 395 384 406 421
Minority Interest 0 0 0 0 Cable TV 137 121 103 98
Net Profit 83 78 85 75 Broadband 122 122 126 124
Net profit bef Except. 83 78 85 75 Fixed Network 0 0 0 0
EBITDA 108 101 111 90 Others N/A N/A N/A N/A
Total 654 627 628 644
Sales Gth (%) (1.1) 0.3 0.9 2.4 EBITDA Margins (%)
EBITDA Gth (%) 2.3 (6.4) 10.5 (19.3) Mobile 36.1 32.4 33.6 34.4
Opg Profit Gth (%) 2.3 (6.4) 10.5 (19.3) Cable TV 33.8 31.8 30.5 29.3
Net Profit Gth (%) (5.6) (5.7) 9.4 (12.2) Broadband 50.5 54.2 61.7 63.5
Opg Profit Margins (%) 20.3 18.9 20.7 16.3 Fixed Network 0.0 0.0 0.0 0.0
Net Profit Margins (%) 15.6 14.6 15.9 13.6 Others N/A N/A N/A N/A
Total 30.4 29.0 28.4 27.8

Source: Company, DBS Vickers

Page 3
Company Focus
StarHub

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson
(www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg
(DBSR GO). For access, please contact your DBSV salesperson.

GENERAL DISCLOSURE/DISCLAIMER
This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers
Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH").
[This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any
form by any means or (ii) redistributed without the prior written consent of DBSVR.]

The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as
to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for
general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial
situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken
in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability
whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this
document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-
owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to
time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or
employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform
broking, investment banking and other banking services for these companies.

The assumptions for commodities in this report are for the purpose of forecasting earnings of the companies mentioned herein. They are
not to be construed as recommendations to trade in the physical commodities or in futures contracts relating to the commodities
mentioned in this report.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction
as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification
on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of
his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of
7 May 2010, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the
securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES


1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned
company as of 05-May-2010
2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered
broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned
company as of 7 May 2010.
3. Compensation for investment banking services:
i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past
12 months, and within the next 3 months receive or intends to seek compensation for investment banking services
from the mentioned company.
ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any
investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to
obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in
any security discussed in this document should contact DBSVUSA exclusively.

Page 4
Company Focus
StarHub

RESTRICTIONS ON DISTRIBUTION
General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction where such distribution, publication,
availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to
hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services
provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”]
under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for
“wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and
regulated by the Hong Kong Securities and Futures Commission.

Singapore This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated
by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No.
198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research
report produced by a foreign DBS Vickers entity, analyst or affiliate is distributed in Singapore only to
“Institutional Investors”, “Expert Investors” or “Accredited Investors” as defined in the Securities and Futures
Act, Chap. 289 of Singapore. Any distribution of research reports published by a foreign-related corporation of
DBSVR/DBSVS to “Accredited Investors” is provided pursuant to the approval by MAS of research distribution
arrangements under Paragraph 11 of the First Schedule to the FAA.

United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the
meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research
distributed in the UK is intended only for institutional clients.

rd
Dubai/ This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor,
United Arab Emirates Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the
DFSA regulatory criteria to be a Professional Client. It should not be relied upon by or distributed to Retail
Clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.

United States Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person
except in compliance with any applicable U.S. laws and regulations.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for
qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such
jurisdictions.

DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424
Tel. 65-6533 9688, Fax: 65-6226 8048
Company Regn. No. 198600295W

Page 5