Why StarHub can smile even if 4Q12 profits likely tanked

Margins may surprise on the upside.

Here's more from Maybank Kim Eng:

4Q12 profits likely down. StarHub will report full year results on 7 Feb, we expect net profit of SGD80-84m (down 9-13%/13-17% YoY/QoQ). Seasonal costs should rise as StarHub likely hired more temporary staff as it ran more promotions during this seasonally stronger quarter, while mobile and Pay TV could see churns rise on greater competition.

But margins may surprise on upside. Despite the launch of iPhone 5 and the Samsung Galaxy Note II however, handset costs are likely to remain lower than a year ago, when it spiked on the launch of the iPhone 4S. The iPhone has lost significant lustre in recent quarters, while StarHub likely achieved better pricing for handsets on the back of higher sales volumes and the strong Singapore dollar. As a result, margins may surprise on the upside. Current guidance is for 30% but it may come in higher.

Topline may be light but it’s alright. Pay TV is expected to experience higher churns as SingTel’s mioTV is now a significantly more compelling product, while roaming revenue could also be lower, similar to the trend reported by M1 earlier. Despite higher churns however, we think StarHub will be able to adjust to shifting sands and hold its ground in Pay TV as it still has the best and most varied content package in town. So far, all the competition has been in English content (eg Fox channels, Barclays Premier League) but StarHub still leads in Asian content as well as educational and food channels. Roaming revenue is likely to have fallen further in 4Q as inbound and outbound roamers used more local prepaid cards given the sensitive economic environment. However, we expect StarHub to have managed costs down as well to mitigate the erosion in revenue, hence we do not expect this to drag down margin. Roaming revenue should rebound in future as the economy picks up.

Look out for dividend guidance. StarHub will also announce its dividend guidance for FY13 along with 4Q12 results. With net debt/EBITDA down to 0.4x, and free cash flow expected to outstrip dividend commitments even with the upcoming spectrum auction (which can be funded from a recent SGD220m bond issue), it certainly has the capacity to raise dividends from the current SGD0.20 a share. It is also possible that it may wait until after the spectrum auction and announce a special dividend instead of raising regular dividends. Whichever it is, we believe StarHub should have more capital management initiatives in 2013 than in 2012.