StarHub: Margin expansion raises the bar

Earnings up 3%, above expectations. In the three months to 31 Mar 09, earnings inched up 3% YoY to S$82.5m on the back of a 0.8% YoY contraction in revenue to S$530.6m. EBITDA margin, at 33%, is flat from a year ago but improved 0.9ppt QoQ. Rising margins for mobile (+0.8ppt YoY) and fixed network (+1.6ppt YoY) led to better than expected results. Strong cash flows. Free cash flow surged almost 4x to S$115.3m (6.7S¢/share) due to improvement in working capital. As a result, Net Debt-to-EBITDA improved to 1.05x, from 1.25x a year ago. Its target is 1.5-2x, which suggests room for capital management. But given the tight credit conditions, this is unlikely to happen. Capex, at 10% of revenue, remains comfortably in check.

OpCo win shaves fears. StarHub, which derives the largest portion of its revenue from broadband among the three telcos, is deemed to be the biggest loser when it comes to the National Broadband Network (NBN). But its OpCo win would have partially alleviated such fears. Moreover, NBN will likely lend a boost to its commercial business, which currently accounts for 20% of revenue.

Confident of snagging EPL rights. Investors have also been worried whether StarHub can retain the English Premier League rights for the 2010-12 seasons. When probed, CEO Terry Clontz appeared confident of winning the rights, claiming that a bidding strategy is already in place. We have assumed that StarHub would win the race by paying 50% more than what it paid three years back. He further believes that incremental costs will be covered, and thinks that analysts who have assumed lower margins may be too conservative.

Earnings estimates, target price raised. We have raised our earnings estimates by 4.2% to S$310.9m in FY09 on the back of improving margins. Dividend yield, at 9.2%, remains the highest among the telcos and the best among the STI components. We derive a target price of S$2.39 based on DCF (previously S$2.35), which implies an upside of 22.5%. StarHub remains our top pick and only BUY in the telco sector.

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