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CIMB:Starhub down graded to underperform 5 Feb ’09

FY09 results were broadly in line, at 98% and 99% of our forecast and consensus respectively. StarHub declared a final DPS of 5 cts, taking full-year DPS to 19 cts, in line with our forecast.

Key takeaways were:

1) weaker  margins;

2)  continued  pressure  in  fixed  broadband  and  fixed  network services; and

3) a subdued FY10 outlook.

We trim our FY10-11 EPS estimates by 2% and our DCF-based target price from S$2.15 to $2.14 (WACC 9.7%) following higher  capex  guidance  and  housekeeping  adjustments.

We  downgrade  the  stock from   Neutral   to   UNDERPERFORM   following   its   recent   strong   share-price
performance coupled with investors’ preference for cyclical stocks.

We believe the stock  has  largely  priced  in  its  higher  dividend  payout  and  StarHub  would  face
pricing  and  margin  pressure  from  NGNBN.  We  recommend  a  switch  to  M1 (Outperform,  TP:  S$2.07),  for  its  capital-management  potential  and  benefits  from NGNBN.

We have introduced FY12 forecasts in this report.

Slight seasonal bounce but margin weakness. Stripping away a 35% growth in handset sales, StarHub’s service revenue only climbed 1% qoq despite growth in all divisions  except  fixed  network  services.  Like  M1  (+1.6%  qoq),  StarHub’s  mobile revenue  rose  1.4%  qoq,  aided  by  increased  usage,  its  iPhone  launch  and  strong take-up  of  data  services.  Broadband  revenue  was  flat  qoq  as  a  2%  subscriber increase was offset by a similar reduction in ARPU. EBITDA margin was down 4.4% pts qoq owing to higher acquisition costs from the expensing of iPhones and heavier promotions/marketing.

Subdued 2010 guidance. StarHub guided for rather muted low-single-digit growth in FY10 topline. The growth would be aided by the economic recovery, the opening of  two  integrated  resorts  along  with  growth  in  mobile  voice,  mobile  data,  wireless broadband  and  fixed  data,  though  offset  by  lower  fixed  broadband  and  pay-TV revenue due to competition ahead of the launch of NGNBN. It also expects a lower
FY10  service  EBITDA  margin  of  30%  (31.7%  in  FY09)  due  to  start-up  costs  for OpCo  and  its  own  RSP,  broadband  discounts,  high  content  costs  and  iPhone subsidies. StarHub raised its cash capex to a maximum of 14% of sales from 13%. Finally, it kept its dividend policy of a minimum DPS of 5 cts/quarter for 2010.


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