StarHub

11 Feb 2009


As expected, StarHub did not perform well for FY2008 when it announced its financial results on Tuesday, February 10. The telco's revenue increased by 5.7% to S$2.1 billion, but net profit fell 5.8% to S$311.3 million. It generated S$597.5m in cash from operations compared to the S$695.9m in cash a year ago.

StarHub expects its revenue for FY2009 to grow by a low-single-digit and does not expect to spend 11% of its revenue on cash capital expenditure. It also expects to declare a minimum dividend of 4.5 cents per quarter, totaling 18 cents for the full year.

The earnings report did not impress CIMB-GK as it maintained its NEUTRAL call on StarHub. It does not think StarHub's business will do well in the recession. But OCBC Investment Research maintained its BUY call on StarHub because it believes the telco's business will remain resilient. DBS Vickers agrees with OCBC and calls for a BUY because it likes StarHub’s track record and high dividend yield.

CIMB-GK's view
CIMB-GK thinks that Starhub is the most susceptible to customer downtrading in the economic downturn in Singapore. Although consumers are more likely to turn to home entertainment during a recession, the broker thinks they will tighten their belts further and cut down on broadband and cable TV products. This will put pressure on its topline and margins.

CIMB-GK also addressed an issue that OCBC did not – that Starhub faces a bruising fight with SingTel for content this year. StarHub will be bidding for premier content in the third quarter of this year. It will be bidding for the rights to broadcast the English Premier League in 2010-2012, and the 2010 World Cup.

The broker concedes that the telco’s yield of 9% is attractive, but M1 is its top telco pick in Singapore, followed by SingTel. This means CIMB-GK places StarHub last on its preference of local telcos. CIMB-GK maintains its NEUTRAL rating with a price target of S$2.27 for Starhub.

OCBC's view
OCBC Investment Research thinks StarHub's business will remain resilient despite the uncertain economic climate. It bumped up its FY2009 estimates from 0.9% to 1.5% and declares that StarHub's 9% dividend yield is attractive enough to warrant a BUY call with a fair value of S$2.78.

DBS Vickers' view
DBS Vickers agrees with OCBC – it has a BUY call on StarHub with a 12-month price target of S$2.20. It sees StarHub as a resilient business and a safe yield play in a relatively low-risk environment. It is betting that StarHub will secure the rights to broadcast the EPL again because SingTel's mioTV has too small a subscriber base to win the bid. But it thinks StarHub will have to pay through its nose for the EPL bid in H2 2009, as it always gets exponentially more expensive.

DBS Vickers also likes that StarHub does not need to pay cash taxes until FY2009 because it has sufficient deferred tax assets. The telco will also potentially budget lower capital expenditures from FY2010 onwards after it completes its three-year network spending on billing and IT systems at the end of this year. This could lead to higher free cash flow – DBS Vickers expects the 11% free cash flow yield to support StarHub's 9% dividend yield.

Telecoms Landscape
With reduced handset subsidies and no more free plans, competition seems to be easing in the postpaid mobile space. Also, more foreign workers in Singapore are leaving because of the economic downturn. This means fewer customers for the telcos, especially in the prepaid segment. According to a DBS report on the local telecoms sector on December 22, there will be a moderate decline in prepaid subscribers for this year.

In such a negative climate, CIMB-GK does not think StarHub will do well and it is NEUTRAL on the stock. But OCBC and DBS Vickers maintained their BUY calls on StarHub because they think the telco's business is resilient and that it offers a very attractive yield of almost 9%. Analysts surveyed by Reuters have on average an OUTPERFORM call on the stock with a price target of S$2.40.

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