Singapore Company Focus

StarHub
Bloomberg: STH SP | Reuters: STAR.SI

DBS Group Research . Equity 28 Jul 2010

Keep an eye on free cash flow

FULLY VALUED S$2.31 STI : 2,979.38
Price Target : 12-Month S$ 2.20 (Prev S$ 2.06) • 2Q10F results to be released on 5th August; net profit
Reason for Report : Earnings Preview & Earnings revision should be in line while free cash flow may disappoint.
Potential Catalyst: Quartely dividends
• Market likely to focus on the non-mobile business prospects
Analyst (40% of total EBITDA) in 2H10F.
Sachin Mittal +65 6398 7950
sachin@dbsvickers.com • If StarHub continues with 20 Scents DPS, equity could
become negative in 2012F.
• Maintain FV with DCF based revised TP of S$2.20.
We expect 2Q10F earnings of S$65m. Compared to 1Q10 earnings
Price Relative of S$43m, 2Q10 should benefit from (i) S$10m higher earnings in the
S$ R e la tiv e In d e x mobile business as handset subsidies decline; and (ii) an absence of
3 .4 0
208 S$12m staff bonus costs in 1Q10. Going forward, we project 3Q/4Q
3 .2 0
3 .0 0
188
earnings of S$77m/S$75m respectively.
2 .8 0 168

2 .6 0 148
2 .4 0
2 .2 0
128
2Q10F free cash flow (FCF) may be less than S$60m. We expect
108
2 .0 0
1 .8 0 88
higher capex in 2Q10, as 1Q10 capex of S$49m was lower than
1 .6 0
2006 2007 2008 2009
68
2010
quarterly run-rate of S$75m. Plus working capital could be negative in
S ta rH u b (LH S) R e la tive S T I IN D EX (R H S )
2Q10 as payables were high in 1Q10. A back-end loaded capex may
lead to declining FCF each subsequent quarter. We project FY10F FCF
of S$251m compared to dividend commitments of S$343m. We
Forecasts and Valuation
could be wrong if FY10F capex is lower than our S$300m projection
FY Dec (S$ m) 2009A 2010F 2011F 2012F (14% of service rev). However, as StarHub has S$100m capex
Turnover 2,150 2,223 2,264 2,303 commitment for NBN over FY10F-12F, a lower FY10F capex implies
EBITDA 654 608 656 667 higher capex in FY11F. If StarHub continues with 20 Scents DPS
Pre-tax Profit 385 313 354 363 beyond 2010F, group equity could become negative in 2012F.
Net Profit 320 260 294 301
Net Pft (Pre Ex.) 320 260 294 301
EPS (S cts) 18.6 15.2 17.1 17.6 Non-mobile business would be the key focus. Non-mobile
EPS Pre Ex. (S cts) 18.6 15.2 17.1 17.6 business would feel the heat from NBN and pay TV subscriber battles
EPS Gth Pre Ex (%) 1 (19) 13 3
in 2H10F. The key question is whether gains in the corporate business
Diluted EPS (S cts) 18.6 15.2 17.1 17.6
Net DPS (S cts) 18.4 20.0 19.7 20.6 can offset the loss in the consumer broadband business. We project
BV Per Share (S cts) 7.0 3.7 0.8 (1.3) non-mobile EBITDA to decline by 5% in both FY10F/11F. We cut
PE (X) 12.4 15.2 13.5 13.2 FY10F earnings by 5% due to smartphone subsidies but raise FY11F
PE Pre Ex. (X) 12.4 15.2 13.5 13.2
P/Cash Flow (X) 7.0 7.5 6.9 6.8 earnings by 6% to reflect the revenue contribution of smartphone
EV/EBITDA (X) 7.1 7.7 7.2 7.1 subscribers. As investors increasingly focus on FCF, we switch to DCF
Net Div Yield (%) 8.0 8.7 8.5 8.9 based (WACC 8.4%, terminal growth 0%) valuation, with TP of
P/Book Value (X) 32.9 61.9 278.4 nm
S$2.20
Net Debt/Equity (X) 5.7 11.7 52.4 na
ROAE (%) 278.1 282.2 750.5 na
At A Glance
Earnings Rev (%): (4.8) 6.3 7.8 Issued Capital (m shrs) 1,715
Consensus EPS (S cts): 15.8 17.2 18.6 Mkt. Cap (S$m/US$m) 3,961 / 2,907
Major Shareholders
ICB Industry : Telecommunications
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 Seletar Investment (%) 7.5
range of mobile, cable TV, broadband and f Free Float (%) 33.5
Source of all data: Company, DBS Vickers, Bloomberg Avg. Daily Vol.(‘000) 2,475

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

Our Segmental projections for next three years

Segmental Revenue (S$m) 08A 09A 10F 11F 12F

Mobile 1080 1094 1184 1263 1,297
Cable TV 398 405 381 339 335
Broadband 257 241 224 204 195
Fixed Network 299 317 338 361 377
Sale of Equipment 98 92 96 97 98
Total Revenue 2133 2150 2223 2264 2,303.2
Segmental EBITDA
Mobile 398 395 364 422 431
Cable TV and Broadband 145 137 122 106 104
Others 104 122 123 128 132
Elimination
Total EBITDA 647 654 608 656 667

Segmental EBITDA Margin

Mobile 36.8% 36.1% 30.7% 33.4% 33.3%
Cable TV and Broadband 22.1% 21.2% 20.1% 19.5% 19.5%
Others 34.7% 38.4% 36.4% 35.5% 35.0%
Total Service EBITDA Margin 31.8% 31.8% 28.6% 30.3% 30.2%

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 2,223 2,264 2,303 Net Fixed Assets 883 911 873 832
Other Opng (Exp)/Inc 0 0 0 0 Invts in Associates & JVs 0 0 0 0
Operating Profit 408 337 377 386 Other LT Assets 356 356 356 356
Other Non Opg (Exp)/Inc 0 0 0 0 Cash & ST Invts 232 167 167 163
Associates & JV Inc 0 0 0 0 Inventory 18 19 19 19
Net Interest (Exp)/Inc (23) (23) (23) (23) Debtors 107 139 142 144
Exceptional Gain/(Loss) 0 0 0 0 Other Current Assets 132 132 132 132
Pre-tax Profit 385 313 354 363 Total Assets 1,728 1,724 1,688 1,646
Tax (65) (53) (60) (62)
Minority Interest 0 0 0 0 ST Debt 219 219 219 219
Preference Dividend 0 0 0 0 Other Current Liab 658 645 659 654
Net Profit 320 260 294 301 LT Debt 694 694 694 694
Net Profit before Except. 320 260 294 301 Other LT Liabilities 37 103 103 103
EBITDA 654 608 656 667 Shareholder’s Equity 120 64 14 (23)
Minority Interests 0 0 0 0
Sales Gth (%) 0.8 3.4 1.9 1.7 Total Cap. & Liab. 1,728 1,724 1,689 1,646
EBITDA Gth (%) 0.9 (7.0) 7.9 1.7
Opg Profit Gth (%) (1.1) (17.5) 12.0 2.4 Non-Cash Wkg. Capital (400) (355) (367) (359)
Net Profit Gth (%) 1.2 (18.6) 12.9 2.6 Net Cash/(Debt) (681) (746) (746) (750)
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 385 313 354 363 Opg Profit Margin (%) 19.0 15.1 16.7 16.8
Dep. & Amort. 245 271 279 281 Net Profit Margin (%) 14.9 11.7 13.0 13.1
Tax Paid (6) 0 (53) (60) ROAE (%) 278.1 282.2 750.5 (6,809.8)
Assoc. & JV Inc/(loss) 0 0 0 0 ROA (%) 18.9 15.1 17.2 18.1
Chg in Wkg.Cap. 35 (33) 4 (9) ROCE (%) 31.6 26.0 29.7 31.7
Other Operating CF 32 0 0 0 Div Payout Ratio (%) 99.0 132.0 115.3 117.6
Net Operating CF 692 552 583 574 Net Interest Cover (x) 17.7 14.5 16.2 16.7
Capital Exp.(net) (232) (300) (240) (240) Asset Turnover (x) 1.3 1.3 1.3 1.4
Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 20.4 20.2 22.6 22.6
Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 92.5 86.7 87.8 86.4
Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 4.4 4.1 4.2 4.2
Other Investing CF 0 0 0 0 Current Ratio (x) 0.6 0.5 0.5 0.5
Net Investing CF (232) (300) (240) (240) Quick Ratio (x) 0.4 0.4 0.4 0.4
Div Paid (309) (316) (343) (338) Net Debt/Equity (X) 5.7 11.7 52.4 na
Chg in Gross Debt 0 0 0 0 Net Debt/Equity ex MI (X) 5.7 11.7 52.4 (32.5)
Capital Issues 0 0 0 0 Capex to Debt (%) 25.4 32.9 26.3 26.3
Other Financing CF (46) 0 0 0 Z-Score (X) 3.6 3.5 2.9 2.9
Net Financing CF (355) (316) (343) (338) N. Cash/(Debt)PS (S cts) (39.7) (43.5) (43.5) (43.7)
Net Cashflow 106 (65) 0 (4) Opg CFPS (S cts) 38.3 34.1 33.8 34.0
Free CFPS (S cts) 26.8 14.7 20.0 19.5

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

FY Dec 2Q2009 3Q2009 4Q2009 1Q2010 FY Dec 2009A 2010F 2011F 2012F

Turnover 532 537 550 557 Revenues (S$ m)

Other Oper. (Exp)/Inc (61) (61) (63) (61) Mobile 1,094 1,184 1,263 1,297
Operating Profit 101 111 90 58 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) (5) Others 92 96 97 98
Exceptional Gain/(Loss) 0 0 0 0 Total 2,150 2,223 2,264 2,303
Pre-tax Profit 95 106 84 53 EBITDA (S$ m)
Tax (17) (20) (9) (10) Mobile 395 364 422 431
Minority Interest 0 0 0 0 Cable TV 137 122 106 104
Net Profit 78 85 75 43 Broadband 122 123 128 132
Net profit bef Except. 78 85 75 43 Fixed Network 0 0 0 0
EBITDA 101 111 90 58 Others N/A N/A N/A N/A
Total 654 608 656 667
Sales Gth (%) 0.3 0.9 2.4 1.3 EBITDA Margins (%)
EBITDA Gth (%) (6.4) 10.5 (19.3) (35.7) Mobile 36.1 30.7 33.4 33.3
Opg Profit Gth (%) (6.4) 10.5 (19.3) (35.7) Cable TV 33.8 31.9 31.3 30.9
Net Profit Gth (%) (5.7) 9.4 (12.2) (42.9) Broadband 50.5 54.8 62.6 67.4
Opg Profit Margins (%) 18.9 20.7 16.3 10.4 Fixed Network 0.0 0.0 0.0 0.0
Net Profit Margins (%) 14.6 15.9 13.6 7.7 Others N/A N/A N/A N/A
Total 30.4 27.4 29.0 29.0

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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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