StarHub – GS

Stable free cash flow; potential near-term catalyst if wins OpCo bid

What’s changed
StarHub’s recent 4Q results were better than expected and management guided for “low single digit” revenue growth for 2009 despite the sharp slowdown in Singapore’s economy. We have raised our 09/10/11 earnings forecasts by 4%/4%/2% on the back of higher revenue expectations and increase our 12-m SOTP based TP to S$2.51 (from S$2.45). Although we think that there is risk to StarHub’s revenue growth guidance given macro uncertainties, we are more confident that it will be able to maintain its free cash flow (FCF) to support its S$0.18 (9% curr yield) minimum dividend guidance, due to its low capex and stable margins.

Implications
A potential upside risk to StarHub’s FCF would be if it wins the right to build the “OpCo” portion of the National Broadband Network (NBN). The winner should be announced this month. Although building OpCo would increase StarHub’s capex over the next several years, we nevertheless believe it could be a positive catalyst for the stock, as we think the project will be value accretive. Importantly, StarHub’s management has said that it is confident it could still meet the S$0.18 annual dividend even if it is building the OpCo. In the event that StarHub does not win the bid, we do not believe there is meaningful downside risk to the stock, as the market does not appear to have priced in any potential OpCo upside.

Valuation
StarHub trades at 2009E FCF/equity and FCF/EV yields of 11.7% and 9.6%, respectively, which we view as attractive relative to its regional peers’ yields of 8.7% and 8.5%. Furthermore, we think that downside risk to the share price is limited, as it should be supported by its high dividend yield of 9%. We derive our TP by capitalizing our estimate of StarHub’s 2009E normalized FCF at 13.4x. We maintain our Buy rating (on Conviction list).

Key risks
A large demographic shift in which foreign workers leave Singapore.

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