Comment on Results Outlook Recommendation
Starhub reported a net profit of S$80.8m,
up 7% y-o-y and 15.4% q-o-q. Excluding
the impact of higher tax rate, the results
are broadly in line with our estimate of
S$83m. Starhub has proposed a 4 cents
interim dividend and raised its full year
dividend guidance to a minimum of 15.5
cents from 14 cents earlier.
Broadband segment was the top
performer in revenues. Revenue grew
10.8% y-o-y with broadband revenue
registering the fastest growth of 15.6%.
Overall service EBITDA margin of 35.3% is
better than 34.4% last year. While there
was an improvement in EBITDA margins in
all the three segments, margins for mobile
business improved significantly by 3 ppt to
43.2% because of (1) focus on higher
margin, pre-paid service that lowered
overall customer acquisition costs (2) efforts
on retention of high-value post-paid
customers with higher minutes of usage
(MoU), even at the cost of market share.
In our view, StarHub is well on track to
surpass its official guidance of “high single
digit revenue growth” and “service EBITDA
margin around 34%” for the full year. We
have slightly trimmed down our earnings
estimates for FY07 and FY08 by 3% each to
factor higher tax rate of 21% up from 18%
assumed earlier.
Expect a stable 3Q07 to be followed by a
strong 4Q07. Pay TV would be the weakest
link in 3Q07 as amortisation of EPL content
cost would kick-in, eroding the pay TV
margins. The projected increase of S$4 in
monthly fee of basic channels would not be
sufficient to cover the higher cost of
content. A hike of S$10 in monthly fee for
sports channels would come into effect in
4Q07, thus helping to sustain the margins.
We suspect, with more advertising revenue,
StarHub would be able to stem the decline
in pay TV margins in the next 6-9 months.
Maintain BUY at our DCF-based (WACC 7%,
terminal growth rate 1%) 12-month target
price of S$3.45.
Unclear picture on National Broadband
Network (NBN). The request for proposal
(RFP) for NBN should be out in 3Q07 and
IDA is expected to award the project
towards the end of 2007. StarHub is one of
the 12 bidders, who have been prequalified
by IDA. It will take another 3-5
years to build the high-speed network and
the operator would need to provide access
to the network at regulated prices to other
service providers. In our view, despite
government subsidy, the project cost would
be substantial with a long break-even
period. Moreover, a completely new
network could introduce excess broadband
capacity in the island, eroding profitability
of all the players. Alternatively existing
networks could be upgraded to provide
high-speed broadband service rather than
building a new network from scratch. IDA’s
decision would be important in this regard.
DBS Group Research . Equity
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