Starhub could have lowest net debt among local telcos in FY11

Still dominant in PayTV; Opportunities with NGNBN
The loss of broadcasting rights for BPL in 2009 gave its largest competitor an opportunity to breach into a market space dominated by Starhub. However, Starhub’s hubbing strategy ensured customer stickiness, which led to low churn rates after the loss. The introduction of NGNBN would allow smaller players, like Starhub, to further penetrate the corporate fixed market dominated by SingTel.

Depressed earnings in FY10 to rebound in FY11E on improved profitability
Starhub’s earnings were negatively impacted in FY10 due to higher cost incurred in subsidizing expensive Smartphones. However, we expect Starhub to record a meaningful improvement in margins that would drive a 20% improvement in profits for FY11E.

Smartphone subsidies hit FY10 profits
Starhub incurred significantly higher cost of equipment in selling more expensive Smartphones at a subsidized rate. Cost of Equipment increased from c.S$50mn/qtr to a peak of S$94mn in 1QCY10, which resulted in a significant drag on its FY10 profits. However, these investments into higher value Smartphone plans paid off over the past year, as evident from the company’s postpaid ARPU uplift.

Financial Forecasts
We expect Starhub to increase profits by 20%y-y in FY11E, aided by improved profitability due to higher PayTV and mobile ARPU in 2HFY11E. Starhub could have the lowest Net Debt to EBITDA among the local Telcos of 0.8X by the end of FY11E, thus giving scope for capital management. We also forecast healthy Free Cashflows that would allow the company to continue paying dividends of 20¢/shr for the next 3yrs.