StarHub not threatened by fibre broadband

• In line. Annualised 1H11 results are in line, at just 2% below our FY11 forecast and 3% below consensus. As expected, a DPS of 5cts was declared. Highlights were strong postpaid revenue growth, stable revenue and margins, and better pay-TV and fixed-broadband performances. While StarHub has lowered its revenue and capex guidance, we maintain our forecasts as the guidance is largely within our estimates. However, we lift our DCF-based target price from $2.42 to S$3.03 as we lower our WACC assumption from 9.7% to 8.6%. We also upgrade the stock from Underperform to NEUTRAL, following easing concerns over the mid-term threat from NGNBN to its fixed broadband business. Attractive dividend yields should limit downside, in our view.

• Decent numbers. Revenue rose 2% qoq in 2Q11 on stronger postpaid revenue from fairly robust net adds and higher ARPUs from more take-up of SmartSurf and data SIM plans. Revenue was flat yoy as 2Q10 benefitted from World Cup revenue and higher sports-package pricing. Margins were stable qoq (+0.2% pt) as higher equipment and staff costs were offset by lower traffic costs due to better bargaining power and economies of scale.

• Easing fixed threat from NGNBN. The threat of NGNBN to StarHub’s cable broadband business has been less than expected due to: 1) fewer homes reached of about 40% of the 70% of homes passed; and 2) little demand for very-high-speed broadband. StarHub’s broadband churns remain low and it will be focusing on bundling to keep rates low. StarHub also noted that a sizeable amount of take-up for fibre is occurring from copper broadband (i.e. SingTel), which means StarHub’ base is not being cannibalised.

• Trimmed FY11 guidance. StarHub has lowered its FY11 guidance from single-digit revenue growth to low-single-digit growth due to slower-than-expected access to the NGNBN network for office buildings. However, it expects corporate broadband/data revenue to pick up in 4Q11 and further in 1H12. It has also lowered its FY11 capex guidance from not exceeding 13% of revenue to 12% due to delays in an undersea cable project. There is no change to service EBITDA margin guidance of around 30% and DPS of 5cts/quarter.