StarHub – DBS
Investors may seek higher yield
• The competition across mobile segment may continue to rise as StraHub seeks to defend its market share.
• Given that M1 offers over 7% yield with stable earnings prospects, investors may seek atleast 9% yield from StarHub.
• Based on 9% yield, our revised target price is S$1.90. We downgrade StarHub to FULLY VALUED.
Our key assumptions for StarHub under the base case scenario. Given that about 10% of StarHub’s pay TV subscribers mainly subscribe for EPL matches, we have assumed subscriber decline of 10%/8%, 10%/8% and 3%/2% across pay TV, broadband and postpaid mobile segments respectively over FY10F/11F. We have assumed cable TV ARPU to decline by 20%/10% for FY10F/11F. We expect earnings decline to reverse in FY12F. Given that StarHub’s free cash flow exceeds earnings, we forecast DPS to be over 16 Scents for FY10F and beyond, translating to 98% payout ratio. StarHub has already committed to 18 cents dps for FY09F.
Mobile market share may not decline, if StarHub turns more aggressive. We believe that StarHub could turn more aggressive on the mobile front with higher handset subsidies and other promotions. In our opinion, StarHub may deepen the bundling discounts, so that its pay TV subscribers retain StarHub even when they subscribe to SingTel’s mio TV for EPL matches. StarHub’s mobile market share could still be protected, although not without adverse impact on the margins.
How much yield would investors seek? Due to the risk of earnings decline in FY10F/11F, investors may potentially seek higher yield from StarHub. Given that M1 offers over 7% yield with stable earnings
prospects, investors may seek at least 9% yield from StarHub till earnings decline trend reverses in FY12F. Assuming 17 cents dps in FY10F, based on 9% yield, our revised target price is S$1.90. We downgrade StarHub to FULLY VALUED.