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StarHub Ltd - MANAGEMENT REPLY: Can it stop losing pay TV market share to mioTV?

Kiran Rameshchandra
Investor Central

18/5/2013 – Brokers have turned bearish on StarHub after revising their revenue outlook and because its rising share price has narrowed its dividend yield.

The telco has revised its revenue guidance to low single-digits, compared to single-digit growth guided previously.

The emphasis is on the word 'low'.

But it has kept everything else unchanged.

EBITDA margin as a percentage of service revenue is expected to be about 31%.

Total capital expenditure in 2013 will be 13% of revenue.

This includes the payment for leasehold land and the construction of its cable TV network transmission centre.

It intends to maintain annual cash dividends at 20 cents per share for 2013.

The company's earnings for Q1 FY13 looked like this:

Revenue: -1.8% YoY to S$580 mln
Service revenue: -0.3 to S$547 mln
EBITDA: +3.4% to S$182 mln
EBITDA margin: 33.3% vs 32.2%
Profit: +3.2% to S$91 mln
Cash flow from operations: S$138.7 mln vs S$144.4 mln
Dividend: 5 cents per share vs 5 cents per share

The fall in StarHub's revenue was mainly due to lower sales of equipment.

But its EBITDA margins increased due to lower operating expenses, from reduced cost of equipment sold and traffic expenses.

Phillip Capital Research maintained its REDUCE rating with a target price of S$4.40 due to limited upside.

Maybank Research downgraded the stock from BUY to SELL with a target price of S$4.20.

It says net profit would have fallen 5% to S$76 mln instead of rising 3%, if it hadn't been for grants given by Infocomm Development Authority (IDA) to drive Next Gen NBN adoption.

The analyst says the dividend yield is getting thinner, competition is heating up, revenue guidance is cut and demands on cash are growing more onerous.

While gearing is ultra-low, the nearest window for a higher dividend has now been pushed back with a delay in the 4G spectrum auction towards H2 FY13.

However, the fixed dividend and yield of 4% will still provide some comfort and prevent an immediate rush to the exit.

And hence, it advises client to sell into strength.

OCBC Research says the stock price has outperformed not only its peers but also the Straits Times Index.

While part of the run-up could be driven by investors searching for yield, current valuations look pricey.

StarHub's yield has also fallen to 4.2%.

A more "risk on" approach could also see investors switching out of defensive stocks.

Hence, it downgraded the stock from HOLD to SELL, with an unchanged fair value of S$4.00.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

1. Can it stop losing market share in Pay TV to mioTV?

Pay TV's ARPU rose to S$52 from S$51 QoQ, as it raised its Sports Group package price to S$18 per month from S$12 per month.

Nevertheless, its revenue and subscriber base continued to slide due to aggressive competition from SingTel.

However, CIMB Research expects the recent Media Development Authority's directive to SingTel should ease competition for StarHub.

management reply: Competition is not restricted to the pay TV space and viewer behaviour has changed with the TV set not necessarily the only screen that is used to consume content. With that in mind, our focus has always been on offering customers the widest and best content delivered over a reliable network, coupled with the flexibility to watch it where they want and when they want to. We will extend our content leadership and continue embracing new technologies such as multi-screen TV. TV Anywhere is one example of our efforts to offer our customers the entertainment experience that they want.

2. Will it be able to monetize data in H2?

StarHub has been rewarding existing customers with 1GB of additional data as part of their earlier promotions.

As a result, monetizing data consumption has been slower.

management reply: The answer is yes. We introduced data tiered pricing last September and because Singapore consumers will want to re-contract with a new phone, they will have to give up their old 12GB plan and move on to the tiered price plans.

3. When will roaming revenue stabilize?

Mobile revenue decreased 1.5% YoY to S$301.9 mln.

The decrease was attributed to lower post-paid outbound roaming revenue, due to changing consumer behaviour in using Wi-Fi for outbound services.

Mobile roaming revenue was lower as higher number of customers travelled overseas at the end of last year.

Management reply: Roaming revenue is affected by seasonality and the global economies in general. For instance, Q4 usually sees more inbound and outbound customers. In addition, 1Q is usually a slow month for roaming, which affected our revenue. But this is not unique to us. Our competitors have also reported lower roaming revenue.

4. Will margins surprise on the upside?

Android devices are generally cheaper than Apple's products.

CIMB Research gathers that, unlike Apple, Android manufacturers would be willing to bear part of the marketing and promotional costs for new handset models.

Hence, it believes that StarHub's EBITDA margins could surprise on the upside from its full-year guidance of 31%.

Management reply: It all depends on the number of attractive smartphones that will be out in the second half of this year. This may increase or decrease margins. We ended 1Q with a 33.3% margin but guided 31% for our FY2013 as 4Q is typically a quarter where margin is suppressed due to seasonality and festive promotions.

5. How does it plan to compete in the broadband segment?

Broadband revenue increased 1.7% YoY due to higher number of customers.

But ARPU was low due to price competition leading to steeper discounts.

Further, fixed broadband subscribers have been flat for the last five quarters while ARPU declined further on competition from smaller retail players such as MyRepublic and ViewQuest.

In other words, competition is unlikely to let up but would intensify even more in 2013.

Management reply: We believe that with our Hubbing strategy already in place since 2002, customers are well aware of the value for money bundles that we offer. In the latest quarter, you would have noticed that we increased the triple service households by about 4% YoY.

6. Would the guided capital expenditure suffice this year?

StarHub has guided capital expenditure to be 13% of its operating revenue this year from 10% to 11% in normal years.

This is due to the need to expand local and international linkages, the need to invest in more Long-Term Evolution (LTE) sites, and tighter Infocomm Development Authority (IDA) requirements on in-building coverage.

Also, the 4G spectrum auction has been delayed to H2 FY13 from June.

But StarHub revised its revenue guidance to low single-digits from single-digit growth previously.

Therefore it makes wonder why did it not raise the guidance for capital expenditure percentage as mathematically it should have risen.

Management reply: The capex guidance is maintained at 13% of our operating revenue. It will be used for the LTE network, the payment of the leasehold land and the construction of our cable TV network transmission centre.

7. What changes will there be in the company's strategy once Nicholas Tan joins as CFO?

StarHub's CFO Mr Kwek Buck Chye is retiring by September 2013.

Stepping into the position will be Mr Nicholas Tan from Singapore Technologies Telemedia (ST Telemedia).

Tan is currently the Senior Vice President of Corporate Planning at ST Telemedia.

Prior to that, he was seconded to ST Telemedia's former Indonesian subsidiary, Indosat, where he served as its CFO for two years from 2002.

This follows the recent appointment as former COO Mr Tan Tong Hai as CEO, replacing the retiring Mr Neil Montefiore.

What will the "two Tans" do differently?

Management reply: There will be no changes in our strategies even with a new CFO. The Board approved the strategies and Management executes them. There will be no change to our dividend policy too. We are committed to paying 20 cents per share dividend for FY2013.

We thank management for its response

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