StarHub – BNP

We held an investor luncheon with StarHub’s management last week. Questions mainly centred on the outlook for the various segments, regulatory updates, dividend policy and iPhone dynamics. We expect StarHub to pay out special DPS of SGD0.15 in February next year, which should act as a catalyst for the stock. Maintain BUY and TP of SGD3.45.

Key points from investors luncheon

Key business segments to see healthy growth
StarHub expects its three key business segments –mobile, broadband and cable TV – to see healthy growth. The key drivers for growth are: 1) an expanding population; 2) more expatriates; and 3) buoyant economic outlook. Management expects penetration rates for mobile to go up to 130-135% (from 114.1% at end-October) in three to five years and for wired broadband and cable TV to go up to 75-80% (from 65-68%) and 55-60% (from 44.3%), respectively, in two to three years.

MNP impact neutral at worst, NBN details out tonight
The implementation of full mobile number portability (MNP) is expected in May-June and is likely to result in higher retention costs for one to two quarters as all three operators seek to retain customers on long-term contracts. With its attractive bundled offerings, we believe the impact on StarHub is neutral at worst. As for the National Broadband Network (NBN), a request for proposal is scheduled for release tonight, which would provide us with more details. Our view is that it is unlikely to be too disruptive to the current network incumbents.

Expecting special DPS of SGD0.15 in February
Earlier this year, StarHub paid out additional cash of SGD442.3m to shareholders based on a targeted net debt to EBITDA ratio of around 1.8x 2006 EBITDA. Assuming management sticks to this target of 1.8x, we believe StarHub could potentially dish out about SGD260m to shareholders, which translates into SGD0.15 per share. This would translate into a yield of 5.1% and is on top of the SGD0.16 DPS that StarHub has already committed to pay out in 2008.

iPhone’s current arrangement may not work here
We understand that Apple’s current arrangement, which involves an exclusive operator (AT&T in US), may not work in Singapore as regulations here do not allow exclusivity. It will be interesting to see if Apple will ditch its current arrangement or will bypass Singapore altogether.

Maintain BUY; target price of SGD3.45
StarHub’s defensive qualities make it stand out in times of stock market uncertainty. Maintain BUY, with DCF-derived TP of SGD3.45.

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