StarHub – CIMB
Wins additional 2G spectrum rights
StarHub has successfully retained its four lots of 1800 MHz spectrum rights and won two additional lots of 2G spectrum − one lot of 1800 MHz and one lot of EGSM − in a spectrum reallocation exercise held by the IDA. Existing spectrum rights for all three mobile operators (SingTel, M1, StarHub) were originally due to expire on 30 Sep 08, but have now been extended to 31 Dec 08. The six lots of spectrum would cost StarHub a one-time fee of S$1.9m. The rights are effective from 1 Jan 09 to 31 Mar 17.
Prior to the spectrum reallocation exercise, SingTel held seven lots of spectrum (four in 1800 MHz, three in 900 MHz), M1 held six lots (four in 1800 MHz, two in 900 MHz) while StarHub held four lots (all 1800 MHz). All 17 existing spectrum lots and an additional lot of EGSM (total 18 lots) were up for reallocation. Since only the three mobile operators submitted bids, each received six lots of spectrum.
Prospects of improved coverage quality but no significant earnings impact. The win of the EGSM spectrum, which operates on 900 MHz, is positive in that it will enable StarHub to improve its mobile coverage in harder-to-serve areas such as distant military camps, hilly or forested areas and the basements of buildings, etc. due to better signal propagation properties relative to the 1800 MHz spectrum. This would improve StarHub’s mobile subscriber experience but we do not expect a significant impact on earnings. The new spectrum lots are not expected to require fundamental changes to mobile networks and the cost for spectrum had been included in management’s guidance for 2008.
Valuation and recommendation
Maintain Outperform and DCF-based target price of S$3.76 (WACC: 6.9%, growth: 1%). StarHub remains our top Singapore telco pick for its attractive CY08 yield prospect of 9.8% backed by strong free cash flow, an unrivalled triple-play proposition and exposure to telco service consumption growth in Singapore spurred by an immigration and tourism boom. Key catalysts for a sustained outperformance could include an upgrade on consensus dividend/capital return expectations which remain well below StarHub’s free cash flow prospects, steady earnings delivery (cable TV likely to surprise on the upside) and a risk-averse market environment.