StarHub – DBS

Firm guidance reassuring

StarHub’s net profit of S$87m (-11% y-o-y, +10% q-o-q) was slightly better than our S$83m estimate due to lower subscriber acquisition costs. Management guided for (i) 18 cents DPS for FY09 vs our 16 cents expectations, (ii) lowsingle digit revenue growth and 31% service EBITDA margin for FY09, and (iii) capex at less than 11% of sales. We think the 32% margin is a possibility given easing competition. Maintain BUY for stable earnings and 8.9% yield, with a revised target price of S$2.20.

Impact of recession vs easing competition. The impact of recession is already visible in lower roaming fees and usage, which led to lower ARPU for postpaid mobile. Going forward, we might also see a drop in prepaid subscribers. On the other hand, lower subscriber acquisition and retention costs after operators halted aggressive handset subsidies could offset the adverse impact of a recession to a large extent, if not completely.

8.9% dividend yield supported by 11% FCF yield. While FY09F dividend yield looks safe, potentially lower capex from FY10F onwards after StarHub completes its three-year network spending on billing and IT systems in FY09 could lead to higher free cash flow even if earnings do not improve.

Maintain BUY with revised S$2.20 TP. We raised our FY09F and FY10F earnings by 5% each after imputing the recently announced job-credits and corporate tax reduction. Our target price is pegged to 12x FY09F PE, which is a 20% premium to our 10x PE target for M1. The premium is premised on (i) StarHub’s better track record, (ii) no cash tax until FY09F because it has sufficient deferred tax assets, and the resultant 11% free cash flow yield should support the 8.9% dividend yield.

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