Starhub – DBSV

Big boost from 4G price hike

• Premium price for 4G service to benefit FY14F/15F earnings by 2%/6%
  
• Corporate fixed line growth to offset weaker broadband & prepaid mobile
  
• Upgrade to BUY with revised DCF-based (WACC 6.5%, terminal 0%) TP of S$4.50, implying potential returns of 16%
  

If 4G prices were to rise to S$10.70, FY15F earnings

could increase by 30%. StarHub will start charging S$2.14 for its 4G service from June 2014 onwards versus its current promotional free offer. The company may further raise the extra charge for 4G to S$10.70 at a later unspecified date. Meanwhile, M1 offers free 4G services till Dec 2014 with regular price for 4G advertised as S$10.70. Elsewhere, SingTel has yet to indicate any intent of following suit. We like to point out that StarHub charges S$8.56 per GB for excess data usage versus S$10.70 by both SingTel & M1. Additionally, StarHub offers extra data-allowance of 1GB than peers on mid- to high-end plans. Even if peers do not follow its premium pricing, we believe StarHub’s 4G plans remain competitive.

StarHub to benefit most from subsidies for SMEs. The government will subsidise SMEs by S$500m over 2014-17 for fibre broadband connections of over 100Mbps. We estimate that Corp. fixed line (~17% of service rev) may grow by single digits to offset the weakness in prepaid mobile (~10% of service rev) and fixed broadband segments (~10% of service rev). Corp fixed line reaps highest EBITDA margins, which we estimate to be 36% versus 20% for pay TV & broadband, and 35% for mobile.

Committed to a fixed 5-Sct DPS each quarter, This translates into a payout ratio of 88%. With FY14F net debtto-EBITDA of 0.5x versus 0.7x for M1 and 0.9x for SingTel, one should expect dividends to rise in FY15F.