StarHub – Morgan Stanley

Capital Management More Visible

Conclusion: We upgrade StarHub to Overweight from Equal-weight with a slightly higher price target of S$3.25. Aside from the 19% upside to our price target, the stock offers a dividend yield of 6.5%, pointing towards a total return of 25% on a 12-month view. StarHub offers a solid defensive option in the midst of continued volatility in equity markets, given the stock’s attractive dividend yield and high earnings visibility.

Rationale for Our Upgrade:

1) We expect the competitive environment in the mobile market to stabilize, as operators have re-contracted 80-90% of postpaid subscribers. In our recent meetings, all operators maintained their margin guidance for ’08, which implies improving competition in 2H08.

2) We expect StarHub to announce S$400-500 million capital management initiative in 2H08, as the company’s gearing levels are running below targets and further progress on NGN discussions implies management has better visibility on medium-term capex plans.

3) Competitive threats from NBN are not expected to emerge until 2010-11. Moreover, the fact that both consortia have existing operators as dominant players implies modest disruption to competitive environment even in the medium term. STH’s bundling strategy remains a key long-term competitive advantage.

Valuation: StarHub shares are now trading at ’09E P/E of 12.9x and ’08E dividend yield of 6.5%, which is 300 bps above the Singapore government bond yield. We believe earnings visibility is improving and dividend yield is attractive.

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