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StarHub Ltd. - Is the stock steady, but boring?

Kiran Rameshchandra

25/2/2013 - StarHub expects operating revenue for 2013 to grow in the single-digit range and EBITDA margin as a percentage of service revenue to be about 31%.

The total capital expenditure will be 13% of operating revenue.

Group also intends to maintain the annual cash dividend payout of 20 cents in 2013.

Meanwhile, StarHub announced that its CEO, Neil Montefiore, will be retiring end of this month.

He will be succeeded by Tan Tong Hai, the current COO, who joined the company in 2009 with over 20 years of related experience.

The company's earnings for Q4 FY12 looked like this:

Revenue: +6.8% YoY to S$654.1 mln
Service revenue: +0.7% to S$563.3 mln
EBITDA: -5.1% to S$175.9 mln
EBITDA margin: 31.2% vs 33.1%
Profit: -5.1% to S$87.9 mln
Cash flow from operations: S$134.3 mln vs S$146.2 mln
Dividend: 5 cents per share vs 5 cents per share

Revenue was up largely due to an increase in sales of equipment by 70.5% to S$90.8 mln.

The higher revenue from sales of equipment was due to higher quantities sold and a higher average selling price.

Brokers are NEUTRAL on StarHub with OSK DMG Research indicating a fair value of S$4.18, CIMB Research at S$3.95 and Phillip Capital Research at S$3.61.

The stock’s key re-rating catalyst is an increasing likelihood of a dividend upside surprise.

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

Question
Question

1. Can TV Anywhere break the vicious cycle of the promotions-and-churn between StarHub Cable and SingTel mio?

Revenue from Pay TV was marginally lower by 1.6% QoQ, due to lower advertising sales.

The subscriber base continued to shrink, down by 5,000 over the quarter to 536,000 and down by 9,000 over the year.

Management attributed this to higher expiration of short term promotions and intense competition with its competitor, SingTel.

So, can the TV Anywhere initiative grow revenue ahead of the "predatory pricing" (in the words of Maybank) of SingTel mio?

Question
Question

2. How much is the impact on business due to small players in the broadband segment?

Broadband revenue increased 0.3% QoQ due to higher uptake of higher speed plans, and a larger customer base.

Churn rates remained high due to more competitive offers from the other providers.

Phillip Capital Research says management expects higher take-up of residential fibre broadband in 2013, although commercial take-up rates may remain slow.

CIMB Research, on the other hand, expects competition for broadband to continue to intensify, not only from SingTel and M1 but also from smaller players such as SuperNet, MyRepublic, and ViewQuest.

Ancilliary to this question is whether OpenNet is working to expectations – the earnings announcement hinted that this was not the case.

While things seemed to be tracking okay now in residential connections, this was not the case for commercial customers.

"NBN access and network provisioning challenges continue to affect the take-up of fibre broadband services by small and medium sized businesses and corporate enterprises," StarHub wrote (page 26).

Question
Question

3. Is it tired of the analysts' fixation on increasing the dividend?

Brokers are disappointed by StarHub not increasing its dividend above 20 cents per year.

In addition, it also guided higher capital expenditure of 13% of FY13 revenue due to the continued LTE rollout.

Capital expenditure is also required for the payment of leasehold land and construction and relocation of StarHub’s cable TV network transmission centre.

During the earnings briefing, the question of the dividend inevitably came up, prompting smiles from management – they had expected it.

But they refused to be drawn into the discussion, and repeated several times that there were some uncertainties and expenses which needed to be taken care of.

It's as though the analysts have nothing else to worry about.

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).

Sources & further information

Sources
Sources


Statutory disclosure
Press release
Presentation materials
Phillip Capital Research Report
OCBC Research Report
OSK DMG Research report
CIMB Research Report


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