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

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 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

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 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

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 Company Focus
StarHub

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