StarHub – DMG

Sparky’s Back for Another Challenge

In 2002, Sparky the Jack Russell Terrier created a splash and quickly became the most recognisable and well-loved telco mascot. Back then, the budding canine celebrity had a mission – to show Singapore that Starhubwas as good as its established rivals by roaming around the island (and later, overseas) to test the mobile coverage of the fledgling telco. Following the successful act, Sparky disappeared for 4 good years and is now making a timely comeback to tide StarHub through another challenging period, as the telcos slug it out with the advent of full mobile number portability (MNP).

Full MNP will leave some temporary scars. MNP was introduced on 13 Jun 08, but the effect has already been felt over the past few months. Market share among the 3 is unlikely to be shaken much, but the amount of marketing and promotional dollars thrown in will lead to pressured margins. In StarHub’s case, average acquisition cost surged 28% to S$124 per subscriber. We are, however, more sanguine on its long-term outlook. On the macro front, the telco players in Singapore have generally co-existed well over the years and have not succumbed to ‘destructive’ competition. At a company level, we believe that StarHub’s ‘hubbing’ strategy mitigates ARPU pressures and improves client loyaltyin the long run.

Promised payout. StarHub has committed to a minimum dividend payout of S$0.18 per share, which works out to a relatively attractive yield of 6.5%.The company is expected to raise the payout if its capex requirements remain low. However, it will unlikely confirm its capex plans till after the award of the NetCofor the Next Generation National Broadband Network, which is expected to be in 3Q08.

Dip creates buying opportunity. StarHub was covered by OSK butwill be transferred to DMG following this report. OSK previously downgraded the stock to NEUTRAL with a target price of S$3.30 on 8 May 08. The stock price has since fallen by 11% to S$2.78. While our revised target price of S$3.10is lower than OSK’s, the potential upside following the decline makes the stock attractive once again. Upgrade to BUY.

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