StarHub – UOBKH
Engineering The Next Phase Of Growth
Leveraging on level playing field in corporate data. StarHub’s limited reach in corporate data services is set to enlarge thirty folds starting Jun 10. The telco is able to service 26,000 commercial buildings island-wide riding on network infrastructure provided by Next Gen Nationwide Broadband Network (NGNBN), versus only 800 within the CBD now. Prospects are further enhanced by the government’s decision to utilise NGNBN for the bulk of its requirement for telecoms services. Hence, this business will expand to 20.8% of service revenue in 2012.
Growth in mobile data traffic enhances ARPU. The launch of Apple iPhone has made smartphones indispensible. 75% of mobile phones sold at StarHub Shops were smartphones in 4Q09. The proportion will expand following the launch of seven new models based on Android, BlackBerry, Symbian and Windows Mobile in 1Q10. Mobile service plans bundled with data are priced at about S$10 above those without data. Thus, we expect post-paid ARPU to increase 6.2% over the next two years.
Pay-TV business faces less risk from cost escalation. Media Development Authority’s (MDA) latest ruling requiring cross carriage of exclusive content is now enshrined in Media Market Conduct Code. Pay-TV operators could henceforth acquire content on a non-exclusive basis or collaborate to jointly bid for content. Cross carriage of exclusive content will result in lower cost of content but reduces differentiation between content provided by StarHub Cable Vision (SCV) and mio TV over time.
Initiate coverage with BUY. StarHub’s valuation is attractive with 2010F EV/EBITDA at 7.6x, compared to 10.3x for SingTel. We estimate 2011 free cash flow at S$0.22/share, representing free cash flow yield of 9.3%. The stock provides a rich dividend yield of 8.4% for 2010-11. Our DCF valuation for StarHub is S$2.92 (required rate of return: 8.5%, terminal growth: 0%).