StarHub – CIMB

Calling for capital management with bond issuance?

We believe that StarHub’s planned issuance of a S$220m bond is a potential step towards a special dividend or increasing its dividend payout. This reinforces our view that StarHub is ripe for capital management given its low and rapidly-falling gearing level.

The bond issuance will be useful for Starhub given the impending spectrum auction, probably in 1H13. We maintain Outperform, with an unchanged DCF-based target price (WACC 7.9%, LTG 1.4%). StarHub remains our top Singapore telco and one of our preferred regional telco picks. This news and a further drop in gearing are key rerating catalysts.

What Happened

StarHub announced that it has priced its S$220m 10-year bond at 3.08%. This is part of its S$1bn multicurrency MTN programme. The closing date is 8 Sep 12. Proceeds will be used to finance capex and for debt refinancing.

What We Think

We think this is a step towards a special dividend or increasing its dividend payout. It reinforces our view that StarHub is ripe for capital management given its multi-year low net debt/EBITDA of 0.5x and strong FCFE. StarHub’s FY12-14 FCFE/share is S$0.22-0.29, based on our estimates and comfortably above its dividend policy of S$0.20/share.

The bond issuance will be useful given the impending spectrum auction, probably in 1H13. The regulator plans to auction off 1800MHz, 2.3GHz, and 2.5GHz spectrum for 4G service, which could cost S$138m if the auction proceeds, based on our estimates. However, telcos could walk away with the spectrum at the yet-to-be-announced reserve price if there is plenty of spectrum to go around.

What You Should Do

Remain invested in StarHub as we think this bond issuance will pave the way for StarHub to either raise its dividend payout or declare a special dividend/undertake a capital repayment. Although StarHub’s existing dividend yield of 5.6%, one of the highest among its regional peers, is already quite attractive, we assume DPS will rise to 22 cts in FY13, implying an even more impressive yield of 6.6%.

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