StarHub – DB

The 10% dividend yield is sustainable: Maintain Buy

Buy for the sustainable yield and upside potential
We adjust STH’s estimates to reflect the EPL loss and 9M09 performance. Specifically, we reduce FY11e revenues by 3% and cut our target price by 6% to S$2.35. But more importantly, we believe STH’s intention to pay 20c/share annual dividend is sustainable given the company’s reserves and cashflows. At current prices, therefore, STH offers a 10% yield and since our S$2.35 target price implies just 8.5% yield (less than regional peers) we view it as achievable over the next 12 months. Given the offered 26% total return at current prices, we reiterate Buy.

Adjusting estimates on EPL loss and 9M09 trends
After EPL loss, we expect STH to lose 60k pay TV and 51k broadband subscribers by end 2010e. In addition, we project FY11e pay TV ARPU will reach S$48 (current S$56) and broadband ARPU to reach S$46 (current S$50). These changes reduce FY11e cable revenues by S$149m versus our FY09e forecast. However, we revise up our mobile and fixed revenue forecasts on 9M09 performance and increase FY11e EBITDA margin to reflect the lower Cost of Services after EPL loss and changes in STH’s revenue mix away from the lower margin cable business.

But the 20c/share annual dividend is sustainable
The above changes reduce our FY11e NPAT by just 2%. But our FY11e EPS at 18c is less than the 20c/share annual dividend targeted by STH which raises questions over the dividend sustainability. But given the company’s shareholder reserves, its willingness to increase balance sheet leverage and our expectation that freecashflow will exceed dividend payout over the long-term, we believe the 20c/share target (and current attractive 10% yield) is sustainable.

TP revised down to S$2.35 but reiterate Buy
Given the above changes, we reduce our target price to S$2.35. Our valuation is based on DCF (7.2% WACC, 0% g) and our target price implies an 8.5% yield which is not aggressive versus comparable peers (see p4) at a target 12.4x FY10e PE. Given the 16% upside to our target price and 10% sustainable yield, we reiterate Buy. Risks include content costs, competition and management change.

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