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Investor CentralStarHub Ltd - MANAGEMENT REPLY: Is margin pressure about to emerge - which of the brokers is right?
22/8/2013 – Analysts expect StarHub's revenue to stay strong with the help of mobile data plans, but a few brokers are still worried about margin pressure in the second half of this year.
For 2013, StarHub continues to expect low single-digit revenue growth, unchanged from its previous guidance.
In addition, it has kept its service EBITDA margin forecast at 31% despite achieving 33.7% in H1, where the launch of new LTE-enabled phones is likely to drive up customer acquisition and re-contract costs.
Capital expenditure remains at 13% of operating revenue.
The group also intends to maintain its annual cash dividend of S$0.20 per share.
The company just announced earnings for Q2 FY13:
Revenue: -1% YoY to S$587 mln
Service revenue: Flat to S$562 mln
EBITDA: +7% to S$192 mln
EBITDA margin: 34.1% vs 32%
Profit: 16% to S$101 mln
Cash flow from operations: S$151.4 mln vs S$200.2 mln
Dividend: 5 cents per share vs 5 cents per share
The group's revenue fell mainly due to lower quantity of equipment sold, which decreased 18% YoY to S$24.9 mln.
However, this was mitigated by 0.3% growth in service revenue to S$562 mln.
Bullish analyst report
StarHub's service revenue was higher as mobile revenue increased 2.8%.
This was due to higher total customer base for post-paid and pre-paid of 2,249,000 versus 2,173,000 and higher post-paid average revenue per user (ARPU) of S$72 versus S$71.
Phillip Capital Research also notes the customer base of 362,000 is now on tiered-data plans.
It continues to see higher take-up in data plans from mobile customers.
In fact, this is in line with answers from StarHub for questions posed by Investor Central in the month of May.
You can refer to the story: "MANAGEMENT REPLY: Can it stop losing pay TV market share to mioTV?" (18 May)
In addition, the current dividend yield of 4.7% remains attractive under current market conditions.
Hence, it maintained ACCUMULATE rating with a target price of S$4.37.
CIMB Research thinks that StarHub's operating results were mixed.
Oddly, handset sales were lower despite the launch of the Samsung Galaxy S4.
The strong take-up of tiered data plans from 25% in Q1 to 32% in Q2 helped drive mobile revenues to grow 2.8% from a decline of 1.5%.
But it lags behind M1's growth of 7.9%.
However, it raised FY13 to FY15 EPS estimates by 3% and target price is raised by 2 cents to S$4.54 to reflect a higher Next Generation Nationwide Broadband Network (NGNBN) adoption grant, which ends in FY15.
The adoption grant it receives from the regulator when users take up fibre broadband service has more than doubled to S$10.4 mln.
It is still NEUTRAL on the stock as it lacks re-rating catalysts, and suggests switching to M1.
Bearish analyst report
Maybank Research says better-than-expected margin in H1 would not be sustainable in H2.
This is because iPhone 6 is expected to be launched by October and the typically higher acquisition costs related to it may impact margins.
In addition, home broadband is expected to remain highly competitive.
Although its full year forecast is tweaked upwards, analyst still expects a weaker H2 for now.
Quite a bit will swing on how well the iPhone 6 sells.
The house maintained its HOLD rating on StarHub mainly because it is trading close to its valuation of S$4.22.
However, louder drumbeats for higher dividends in FY14 to get louder toward end of FY13 and support the stock at current levels.
OCBC Research has kept its estimates unchanged because of the margin pressures likely to emerge in H2.
Hence, it maintained SELL rating on the stock with an unchanged fair value of S$3.82.
While StarHub will be able to cross-carry the widely-followed Barclays Premier League (BPL) live matches for the upcoming 2013 to 2016 seasons, it does not expect the move to have a material financial impact.
Although StarHub has revealed new "Surf & Bundles" with a S$300 rebate for new customers to watch BPL on its cable TV platform, the analyst notes that SingTel has responded with its own packages, dangling a S$480 discount for new and existing customers.
Hence, the BPL cross-carriage is likely a non-event.
Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.
1. Is the Pay TV business stabilising?
The subscriber base seems to be stabilising even without the benefit of the latest English Premier League (EPL) cross-carriage ruling by the Government.
StarHub lost 2,000 subscribers in Q2, but this was a big improvement from the 4,000 to 5,000 loss of the past few quarters.
Going forward, Maybank Research expects its new EPL pricing plans, which include a S$300 rebate for the first year, to help reverse the subscriber losses.
The rebate will be funded by cross-carriage fees and no impact on financials is expected.
Management reply: Rather than purely chasing after subscriber numbers, we want to focus on ways to grow our Pay TV revenue, both in terms of subscription and monetising content.
2. Will regulators obstruct StarHub's plan to produce more local programmes?
To differentiate its content from that of SingTel, StarHub plans to produce more local programmes, citing the success of Academy Fantasia and, more recently, Lady First Singapore, which attracted a large viewership.
But CIMB Research says the regulator has some restrictions on StarHub regarding content production, and therefore its ability to generate differentiated content may be limited.
Management reply: In introducing local content onto our Pay-TV platform, we have to follow the Subscription Television Programme Code. We do not see this as an impediment to the introduction of more local content onto our platform.
We thank management for its response
©2013 Investor Central® - a service of Hong Bao Media
