StarHub – CIMB

Show me the money

Our recent chat with StarHub executives has given us reason to believe that the company is more likely to raise dividends than undertake a one-off capital management exercise. Competition in fixed broadband is likely to stay benign as we expect fibre connections to remain slow.

We tweak our EPS estimates upwards as we now assume it will raise DPS rather than pay out 25 cts in a capital reduction. StarHub remains an Outperform and our top Singapore and regional telco pick. Our DCF-based target price is unchanged.

More cash than it needs

StarHub continued to downplay the possibility of a one-off capital management exercise to optimise its capital structure as it does not sustain the share price. In addition to the uncertain economic conditions which it earlier cited as a reason to be cautious, StarHub is also erring on the side of caution due to regulatory developments such the common-feature set top box. As a result, we now think a higher dividend is more likely than a capital reduction exercise.

NGNBN stuck in the slow lane

Unless the Minister steps in, we understand that there is little the regulator can do to compel OpenNet to step up its service delivery of 2,400 premises per week. This is because OpenNet is already adhering to an agreement with the regulator, which has been revised up from 2,050 in the earlier agreement.

Such a scenario favours StarHub as the adoption of higher-speed broadband is slowed down, which poses less of a challenge to StarHub’s dominance. StarHub’s cable broadband has superior bandwidth over SingTel’s copper-based broadband.

Small step towards monetising data

All three telcos are offering a lower data bundle of 10GB for the latest iPad vs. the previous bundle of 12GB, indicating that they are making baby steps in trying to monetise the surging data traffic.

Raising our DPS estimates

We now assume StarHub will raise its quarterly DPS from 5 cts to 5.5 cts starting 3Q12 and 6 cts from 1Q13 vs. our earlier assumption that it will pay out 25cts in FY12 from a capital reduction. We strongly feel that StarHub will soon have to take steps to optimise its increasingly under-leveraged balance sheet.

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