StarHub – DBS

Good entry price for yield play

StarHub is a safe yield play in a relatively benign competitive and regulatory environment. Higher cost of sports content might affect its bottom-line in FY10F, but it should not be excessive and has been included in our below consensus estimates. Upgrade to BUY for 13% share price upside and 8% dividend yield.

Stable FY09F earnings despite economic slowdown. It is reasonable to expect lower roaming revenues as Singapore’s tourist arrivals drop. But rising data revenue following offers of unlimited data plans should offset the weakness to a large extent. FY09F will also benefit from the absence of S$6-7m Euro Cup content costs incurred in FY08 and easing competition in the postpaid mobile space.

Least worried about dividends. Management claimed it had sufficient unutilized and committed credit facilities from local banks to meet (i) refinancing needs for the next twelve months, and (ii) capex requirements for OpCo, in case StarHub wins the award. Management believes it can continue to pay average dividend payout of 65-70% of free cash flow, implying upside to our 8.4% yield projection.

PCCW case suggests StarHub might secure EPL again. In our view, PCCW in Hong Kong had secured key channels such as Star TV, HBO, etc., and built a respectable subscriber base before aggressively going after EPL. This is not the case with SingTel, which has a small subscriber base (around 50K) for mio TV with many popular channels still held by StarHub. We estimate the EPL bid price in 2006 was S$40-50m higher than that in 2003, and the magnitude of increase should be comparable in the 2H09 EPL bid, whose impact on the bottom-line will be visible only in 4QFY10.

Upgrade to BUY, S$2.08 target price unchanged. This is pegged to 12x FY09F PER, or 20% premium to our 10x PER target for M1 due to (i) StarHub’s better track record, (ii) no cash tax till FY09F, resulting in 12.5% free cash flow yield and providing sufficient cushion for 8.5% dividend yield.

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