Starhub – DBSV

Assured 5% yield with some growth

4Q12 earnings were 22% ahead of consensus due to lower than expected handset subsidies

FY13F/14F earnings raised 8%/6% on lower subsidies and growth in digital voice home services revenue

Maintain BUY with higher TP of S$4.30

Handset subsidies on a declining trend. 4Q12 earnings of S$87.9m (-5% y-o-y, -9% q-o-q) were 22% ahead of consensus estimates. Handset costs increased only 30% y-oy despite handset sales rising 70% reflecting higher mix of Android and Windows smartphones. Unfortunately, StarHub did not raise dividend guidance for FY13F despite net debt to EBITDA of only 0.5x versus 0.8x for M1 and 1.1x for SingTel, citing spectrum auction and future 4G capex.

Multiple growth drivers for FY13F. Besides lower subsidy burden, key drivers are (i) market share gains in the corporate data space where SingTel enjoys ~80% share (ii) full year impact of new revenue from digital home service as StarHub has started charging S$10.90 per month (prev. free) from Sep 2012 onwards (iii) significant rise in "other income" as StarHub (official OpCo) receives adoption grant from more people migrating to 100 Mbps broadband. These drivers should more than offset challenges in the pay TV segment in our view.

COO Mr. Tan Tong Hai to be new CEO by end Feb 2013. Mr. Tan had successfully turned around Singapore Computer Systems and Pacific Internet in his previous roles. Growing corporate data and defending pay TV business are the key challenges for him. We switched from DDM to DCF (WACC 6.5%, terminal growth 0%) valuation to capture FCF growth to derive a new TP of S$4.30.

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