Keeping Its Gun Powder Dry

We hosted Starhub at our recent Asean Conference in Singapore where the telco recorded a good number of meeting requests. Discussions were centered on the upcoming bid for the 2013-2016 broadcasting rights to the BPL, capital management and data monetization efforts. There were no major surprises with management reiterating the need to maintain sufficient cash buffer in view of the uncertain industry dynamics. Starhub’s share price has re-rated on yield attraction but we think further upside may be capped by concerns over margin dilution from the BPL and steep device subsidies. We remain NEUTRAL on the stock but up our FV to SGD3.30 from SGD2.80 after lowering our WACC.

Sustainable dividends. Starhub prefers to grow its dividends progressively as to provide sustainable returns over the longer-term. While management acknowledged the potential for capital management due to the under-leveraged balance sheet, it prefers to keep its ‘gunpowder’ dry due to (i) regulatory uncertainties, (ii) the upcoming bid for the BPL and (iii) the intense mobile competition where device subsidies remained high. The telco has reaffirmed its 20cents/share dividend commitment for FY12 which translates into a decent net yield of 6%. Starhub continues to be the only telco that pays out quarterly dividends.

Pricing data the way it should be. We think it is a matter of time before Starhub responds to Singtel’s earlier move to lower its data cap on its 3G plans to better monetize data traffic. The incumbent’s move has raised the ire of some of its high usage data subscribers, benefitting Starhub and M1. We think Starhub will be in a better position to introduce a new set of data plans given that is already capitalizing on the lower data cap on its multi-SIM plans which have been well received. We expect the group to expand its LTE coverage to more areas outside of the CBD in 2013.

BPL- the sky is the limit? Starhub is evaluating all options including submitting a joint bid for 2013-2016 BPL season which starts in September. We expect the group to bid rationally, having learnt from the bitter experience in 2009 where it lost out to Singtel and with the benefit of the cross carriage ruling which requires that all content secured on an exclusive basis be shared. In the worst- case scenario that Starhub is not able to procure the BPL content directly (Singtel maintains exclusivity), it is still able to offer BPL to its pay-tv customers via the cross carriage arrangement with Singtel.

Domestic M&As. Starhub does not rule out domestic M&As if the business proposition makes sense and is synergistic to its existing quad play model. We think some acquisition activities may present itself within the broadband segment and content space, allowing Starhub to enhance its market position and competitive advantage.