StarHub – DBS

Expectations too high!

• We estimate an adverse impact of 5%/10% and 2%/3% on FY10F/11F earnings due to EPL loss
and expiry of job credit scheme respectively.
• Our FY10F/11F earnings are 8/11% below consensus
• We doubt if free cash flow can sustain 20 cents DPS in FY11F. Maintain FV with revised TP of
S$2.06

Why we differ? Contrary to the street’s expectations of EPL loss being EBITDA neutral, we estimate negative impact of at least S$17m/S$34m on FY10F/11F earnings. Our estimate of households leaving StarHub broadband is higher than street expectations. We estimate 14% of StarHub broadband subscribers may leave StarHub for SingTel and M1 within a year. Secondly, street may not have captured potential loss of mobile subscribers due to the “hubbing” proposition, which we think cannot be ignored. We estimate over 3% of post-paid mobile subscribers may leave StarHub in a year. We look forward to FY10F guidance from the incoming CEO Mr. Neil Montefiore on 4th Feb with 4Q09F results briefing.

Can free cash flow sustain 20 Scts DPS beyond 2010? Management has guided for annual 20 Scts DPS, which exceeds its est. FY09F EPS, as StarHub does not have to pay cash tax till late 2010. However beyond 2010, in our view, 20 Scts DPS could be sustained only by raising debt.

Our FY10F/11F earnings are 8%/11% below consensus. We are mindful of higher depreciating charges due to OpCo related capex in FY10F. We would value the company on 12x FY10F PER, at 10% discount to M1’s 13x target PER, due to (i) M1’s lower net debt to EBITDA of 0.7x compared to 1.0x for StarHub, and (ii) M1’s stable earnings prospects compared to declining earnings for StarHub.

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