StarHub – OCBC

Invests in ASE JV

Building the ASE network. StarHub Ltd announced that it has joined several Asian carriers to build and operate the Asia Submarine-Cable Express (ASE) – a 7,200 km undersea cable system linking Singapore directly to Japan, the Philippines and Hong Kong. The ASE will also have connectivity to Malaysia and potentially future connectivity to China, as well as other SE Asian countries. StarHub, NTT Communications, PLDT and Telekom Malaysia will jointly build the system, which is estimated to cost around US$430m (S$552m), and is expected to start operation by Jun 2012. According to StarHub, the launch of ASE will bring about strong connections into the US via the Asia-America Gateway, and also allow network operators to compete on speed and reliability, as the ASE will boost a total bandwidth capacity in excess of 15 terabits per second and is specifically designed to avoid earthquake and typhoon-prone regions.

Internal resources sufficient for now. StarHub did not give further details on how much is its investment in the ASE. Assuming that each partner takes an equal share of the cost, we estimate that StarHub could be investing up to S$138m over the next 18 months to build the infrastructure. We also understand that other telco operators typically buy-in into such ventures closer to the operational date, thus further reducing the investment put in by the original partners. In any case, looking at its cash balance of S$246.8m (as of 30 Sep 2010), net gearing of just under 52%, and free cashflow of S$308m for 9M10, we believe that StarHub should be able to finance its investment using internal resources and more bank loans. We do not expect the new investment to put its current S$0.05/share quarterly dividend at risk.

Data usage on the rise. We are positive on the latest development for a couple of reasons. Firstly from a demand point of view, we agree that the phenomenal rise of data usage is expected to continue, fuelled by the proliferation of smartphones, tablets and other Internet-ready devices that are constantly fetching data to keep users connected. Hence having access to such infrastructure is crucial; and by being an “owner”, StarHub will also be able to benefit from a cost point of view. Note that ASE is the telco’s second investment in submarine cables.

Maintain BUY with S$3.02 fair value. As such, we maintain our BUY rating and S$3.02 DCF-based fair value.

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