Starhub

Kim Eng on 3 Feb 2012

StarHub (STH SP) – Strong margins
Previous day closing price: $2.83
Recommendation – Buy (maintained)
Target price – $3.27 (maintained)


Strong close to 2011. The feared negative impact on margins from strong iPhone 4S sales did not materialise. Even excluding capex-related cost provisions, service EBITDA margin was in line with guidance of 30%. StarHub continued to guide for revenue growth and stable margins in 2012, and reiterated its commitment to a stable dividend. Buy with target price of $3.27 based on a 6.5% yield target.


Above expectations. StarHub brought FY11 to a strong close on outstanding performances in almost all segments, especially postpaid mobile. Although full-year net profit of $315.5m included the write-backs of capex-related cost provisions, we estimate a net profit of $302m if those write-backs were excluded, in line with consensus. However, the negative impact feared from iPhone-related subsidies did not materialise as service EBITDA margin was resilient at 30.7% (post-adjustments).


Mobile postpaid outperformed. Postpaid mobile did particularly well as StarHub gained at the high-end. Average revenue per user (ARPU) rose 4% YoY in 4Q11 on the back of an increasing mix of high-end SmartSurf plans. Residential broadband revenue held steady, with net-add of 2,000 customers despite lower ARPU as StarHub drove its hubbing proposition forward. Finally, Pay TV benefited from a commitment fee increase last August.


Margins held up despite strong iPhone 4S sales. Sales of equipment spiked 69% YoY to over 20% of sales on higher iPhone 4S sign-ups. As with M1, StarHub also reported heavy recontracts of the iPhone 4S from out-of-contract 3GS users which was launched in end-October. We expect this to start to normalise in 1Q12 and retreat further in 2Q12. However, margins held up well on lower operating costs. Even after provision adjustment, EBITDA margin was in line with guidance.


Positive guidance. StarHub’s 2012 guidance of low single-digit growth in revenue and service EBITDA margin of 30% is virtually unchanged from 2011, highlighting management’s confidence despite the slowing economic conditions. In addition to the normal quarterly dividend of $0.05/share declared for 4Q11, management also reiterated its commitment to continue its dividend stance, for another $0.20/share in 2012.