Headwinds blow likelihood of higher dividends away
▊ Starhub’s FY13 core net profit missed our forecast by 4% and the market by 5% due to weaker-than-expected service revenue. More disappointing is the fact that the telco is not raising its dividends because it sees “tremendous headwinds” ahead. While we concur with its operational outlook, we feel that Starhub has the financial capacity to raise its dividends and it is taking a very conservative stance. Due to the earnings miss, we reduce our FY14-15 EPS estimates by 8-9%, our DPS forecast by 17% and our DCF-based target price by 7% (WACC: 7.8%). However, Starhub remains a Hold, supported by its dividend yield of 4.7%. M1 remains our top Singapore telco pick.
Starhub’s service revenue was flat yoy, with marginal growth in mobile, pay TV and fixed services offsetting a decline in broadband. Not surprisingly, 4Q13 broadband revenues fell by 11% yoy (Figure 1). While mobile and cable TV revenues nudged up 1% and 2%, respectively, they face margin pressure from falling IDD rates and higher content costs.
Despite its net debt/EBITDA hovering at 0.6x, near multi-year lows, Starhub has disappointingly retained its DPS of 20 Scts/year. This is because management expects “tremendous headwinds”, and a higher DPS must be sustainable. While we agree that its broadband and pay TV franchises are facing stiff competition and its mobile division is stagnant, we believe that there is sufficient headroom from its FCF to justify a dividend increase.
Starhub expects its capex to remain elevated at 13% of revenue in FY14 (FY13: 14%) as it invests in its pay TV head-end and forks out S$40m for 2x20MHz of the 2.5GHz spectrum. Management has guided that its service revenue will grow in the low single-digit range and its EBITDA margin on service revenue will remain at 32%.
Publish date: 07/02/14