StarHub – DBS

Price reflects challenges ahead

• StarHub 2Q09 net profit of S$78m (+21% yoy, -6% qoq) is in line with our expectations.
• We revised our TP to S$2.40 pegged at 13x FY09F PER (12x earlier), at 10% discount to (i) Our SingTel’s revised target PER of 14.5x (ii) Regional average PER of 14.5x.
• The stock has not moved up, underperforming STI by 16% since our downgrade on 27th May. Maintain HOLD in view of limited upside.

StarHub has achieved over 50% of our FY09F forecast. As expected, 2Q09 profit was significanlty better than 2Q08 profit, which was hit by competition due to mobile number portability. Overall, we see no risk to FY09F earnings and 18 Scents DPS estimate for FY09F. Management expressed confidence in securing the English Premier League (EPL) rights, providing there is rational competition from SingTel, in line with our view. The outcome of the bid is in 2-3 months time. Management conceded that EPL right could come at a higher price than the last time, but believed that pay TV margins could be kept stable.

Mobile business showing signs of recovery ahead of other segments. (i) Mobile ARPU showed sequential recovery with higher roaming and data contribution. (ii) Broadband ARPU showed sequential decline due to higher discounts and lower speed plans, in line with our view. (iii) Pay TV ARPU showed sequential decline due to lower take up of premium channels, which could be temporary. (iv) Fixed line business was stable sequentially.

Target price revised to s$2.40 in line with higher valuation for peers. Our SOTP target price of S$3.50 for SingTel, with earnings FY10F-FY12F CAGR of 8%, translates into 14.5x FY10F (Mar year end) PER. Given that StarHub is exgrowth due to challenges ahead in the broadband and pay TV segments, we assign StarHub a PER of 13x at 10% discount to SingTel’s and regional peers average of 14.5x PER.

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