StarHub – DBS

Negatives priced in

Story: The recent sharp decline in the stock prices have brought Starhub valuations to a more reasonable level given its stable earnings outlook and attractive 8% dividend yield. Margin pressure in broadband and cable TV is a concern, but that would be mainly felt in FY10 and is adequately captured in our below-consensus earnings estimates.

Point: We have three key points to highlight here.

(i) Competitive intensity to ease with SingTel signaling cost cutting. Competition seems to have eased, based on lower handset subsidies, which have come down from peak of about S$300 per handset in 1H08 to about S$100-150 currently. StarHub had won a handsome share of post-paid mobile subscribers in 2Q08. This should benefit the company over the next two years due to its policy of expensing handset subsidies in the same quarter rather than amortizing over a two-year contract period. Recently SingTel’s Singapore CEO Mr. Allen Lew said SingTel would freeze headcount and cut marketing expenses to focus on costs savings, which supports our view of easing competition. This may also imply that festive promotions in 4Q08, can be absent this year, leading to better margins.

(ii) StarHub could benefit marginally from price hike by SingTel. StarHub has extended its fixed line service for free to its pay TV customers after SingTel raised its fixed line service charges by c. 14%. Since this is a VoIP phone service, costs are minimal for StarHub, and it will gain from (i) one-time activation fee of close to S$40 (ii) more revenue from its international direct dialing (IDD) service and (iii) higher value proposition for its pay TV business and up-selling of more services.

(iii) Telcos are relatively immune to economic slowdown. Amid a slowing Singapore economy, telecom players like StarHub should continue to report stable earnings as consumers and business continue to spend on communications needs.

Relevance: We peg our target price to 14x average FY08-09F EPS, implying 20% premium to our target PER of 12x for M1, and at the lower end of Starhub’s historical PER range (13.3x-19.4x). Upgrade to HOLD with target price of S$2.50.

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