StarHub – CIMB

Cautious tone

Bloomberg has reported StarHub’s CFO Mr Kwek Buck Chye as saying:

• Its users may scale back spending on telecom services because of credit tightening on corporate and small business customers, although he believes that consumers “will still use our services but less”. Despite this, StarHub is maintaining its revenue growth guidance of 7% yoy for the year.

• StarHub does not plan to refinance its S$142.9m loan which will be due within 12 months. “It’s not a question of availability for us; it’s a question of whether we want to go ahead and take that risk. I think the better time would be to wait six months to a year.”

Comments

StarHub’s cautious tone does not surprise us and is consistent with our negative view on the company. Also, by planning to repay the S$143m loan, we believe the chances of a special dividend or capital repayment are significantly reduced. StarHub had cash of S$102m and debt of S$828m as at 2Q08. When we downgraded our rating on StarHub to Underperform on 5 Sep 08, we highlighted, among other things, that: 1) consumers may downtrade on its services due to higher costs of living; and 2) StarHub may not undertake capital management in FY08 given a fairly high gearing of 1.41x , slightly below its long-term target of 1.5-2.0x.

Mr Kwek’s statements came on the back of SingTel’s recent comment that: “The tea leaves are indicating that things are going to be very uncertain” and it will “start to curtail some of our unnecessary spending and be a bit more cautious.”

Valuation and recommendation

Maintain UNDERPERFORM, with a DCF-based target price of S$2.30 (WACC 7.5%, terminal growth 1.7%). De-rating catalysts could include rising concerns over weaker-than-expected revenue, and the cost of content, in particular that of football.

As we head towards year-end, we expect investor attention to turn to events in 2009, and focus on the bidding war for the rights of both the World Cup and BPL in mid- 2009. We prefer MobileOne (M1 SP, Neutral, target price S$2.05) for its more visible earnings and attractive dividend yields of 8%.

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