From Q110 Results,

• EPS drop to 2.49ct (Q110) from 4.33ct (Q409) and 4.97ct (Q309)
  
• Due to higher investment cost for acquisition and retention for smartphone customers
  

 Extracts from Q110 Results Press Release,

Outlook for FY2010  

• YoY growth of Group 2010 operating revenue to be in the low single digit range
  
• Group EBITDA margin to be around 28% on service revenue
  
• Capex payment for FY2010 will not exceed 14% of operating revenue
  
• Cash dividend payout remains at a minimum of 5 cents per ordinary share per quarter for FY2010
  
• Even though the higher investment cost for acquisition and retention for smartphone customers have affected profitability during this quarter, we expect higher benefits to accrue in subsequent periods
  
• 9% increase in triple-service households
  

 Note: Some of the rows were extracted from their Q110 Results Presentation.

Comments 

• Outlook for FY10 is EBITDA Margin = 28% vs 22.5% for Q110 means an average of 29.8% for the next 3 Quarters
  
• Using EBITDA Margin vs EPS for Q109 vs Q110, I estimate an average Quarterly EPS = 4.12ct for the next 3 Quarters
  
• Optimistically, I’d like to see DPS = EPS by Q410 and assuming a gradual recovery in EPS, I get,
  
  • Q210 = 3.24ct
    
  • Q310 = 4.12ct
    
  • Q410 = 5.00ct 
    

Warning

• The above is just a ball park estimate based on the forward statements (which may not be accurate)
  
• My method of estimation is also not scientific in nature and will likely be wrong
  
• It does not take into account any damage from their recent World Cup bid, which’d likely incur additional losses
  
• I’m vested (12% of portfolio) and I may be biased in my views 
  

Other Observations

Extracts from Q110 Financials,

Cost of Sales – For the quarter, cost of sales amounted to S$249.2 million, up S$50.7 million or 26% year-on-year. The increase was largely attributed to higher cost of equipment and cost of services. As a percentage of operating revenue, total cost of sales was higher at 44.7% in 1Q-2010 as compared to 37.4% in 1Q-2009.

Cost of Equipment – Against 1Q-2009, this quarter’s cost of equipment sold was S$45.1 million or 93% higher at S$93.8 million. The year-on-year increase was primarily due to a higher quantity of handsets sold and a higher sales mix of smart-phones which unit costs were higher. As a percentage of operating revenue, cost of equipment ratio was up from 9.2% in 1Q-2009 to 16.8% in this quarter.

Cost of Services – Cost of services for the quarter increased S$5.3 million or 6% year-on-year to S$88.4 million. About 79% of the increase was attributed to Pay TV services where higher rates were paid for new contents acquisition and existing content renewals. The balance year-on-year increase was mainly in line with the higher service revenue and customer additions in the quarter. As a percentage of operating revenue, cost of services was 15.9% in 1Q-2010, up marginally from 15.7% in 1Q-2009.

Staff Costs – For the quarter, staff costs increased S$15.0 million or 29% year-on-year to S$67.7 million. This was primarily due to a S$12 million additional charge this period for 2009 variable bonuses that was paid in 1Q-2010. Excluding this additional charge, the Group’s staff costs would be 6% higher year-on-year, largely attributed to higher temporary staff costs and reduced job credits grant from the Government. As a percentage of operating revenue, staff costs (excluding the additional 2009 bonus provision) approximate 10.0% in 1Q-2010 as compared to 9.9% in 1Q-2009.

Comments

The biggest impact to the drop in EPS comes from ‘Cost of Equipment Sold’ ($45.1M). Unless StarHub continues to acquire new customers at the same pace as Q110, wouldn’t this figure drop towards the Q109 level? If so, EPS should climb back up quickly in the coming quarters. But, if this signifies a new policy direction (with the new CEO) ie. Lower Margins, then the higher ‘Cost of Equipment’ could be a more permanent thing!

My Thoughts

• I’m currently inclined to sell if the price is above $2.25 or even $2.20 (Previously, at EPS = 4.xct, I’d intended to hold as long as DPS is at least 4.5ct)
  
• But, with the ripples from the Greece fallout (affecting DJIA severely on Thu and Fri), chances of hitting my target price is low
  
• There’s still a possibility of a technical rebound (STI was –ve for 5 sessions so far and had dropped ~160pts) or if Europe handles the Greece situation well and market regains confidence
  
• There’s a very high chance that price may drop further (much more than the dividend of 5ct) after it goes xd on 20-May-10
  
• Most likely, I’ll end up holding all my StarHub shares unless I take partial profit at a lower target price (Will decide before it goes xd)
  
• The consolation is, with a dividend policy of 20ct for FY10 (assuming they don’t change it), I can live with a 20ct drop in share price for the year but no consolation if it drops back to $1.88 or lower