StarHub – OCBC

UPGRADE TO HOLD ON VALUATION GROUNDS

  • 15% correction
  • Yields back at 5%
  • Upgrade to HOLD

Sharp fall after we downgraded our call

StarHub Ltd saw a sharp drop in its share price after we downgraded our call from Hold to Sell on 10 May following its 4Q12 results announcement; note that it had also lowered its revenue growth guidance from single-digit to low single-digit while maintaining its EBITDA margin on service revenue at 31% (versus 33% in 1Q13). Since then, the share price has fallen some 15% from S$4.72 to a recent low of S$4.01.

Rationale for our previous downgrade

However, we note the stock price has outperformed not only its peers but also the STI – and this outperformance was mainly driven by investors searching for yield. In our view, we do not see this as sustainable as this has made valuations pricey and the yield had also fallen to some 4.2%. And this made it “vulnerable” should the yield compression story falter. We were also concerned by the possibility of seeing a flight of out of the more defensive counters like telcos should investors take a more “risk on” approach. On hindsight, it appears that we were correct on both counts.

Revising fair value down to S$3.82

Going forward, the risk of rising bond yields could continue to sink the yield compression story. And since we are using a DCF-based valuation methodology, higher bond yields will result in our fair value easing from S$4.00 to S$3.82. Fortunately, as StarHub has maintained its S$0.20/share dividend payout this year (and is likely to continue to do so in our view), its dividend yield has risen back to around 5% (or 5.2% based on our fair value). From a valuation perspective, we upgrade our call from Sell to HOLD.

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