Upgrade to HOLD post-correction. The share price has corrected significantly since our downgrade to SELL in May to near our DCF-based fair value of SGD4.22. We upgrade the stock from SELL to HOLD with TP maintained at SGD4.22. It is too early to confirm now but catalysts in 2H13 would include a potential increase in FY14 dividend now that cashflow uncertainties viz spectrum auction have cleared up, and we anticipate drumbeats for this to get louder toward end-FY13. Recent reprieves – the government’s rejection of SingTel’s appeal for EPL not to be subjected to the cross-carriage rule, and lower-than-expected 4G spectrum auction cost – may cause StarHub to be more receptive toward paying higher dividends, in our view. Our telco preference is M1 followed by StarHub and SingTel.

4G spectrum auction cost better than expectations. As expected, only the three incumbent telcos bidded for the 180MHz in 4G spectrum that was put up for auction and all walked away with paying just the reserve price asked for by the IDA. StarHub will pay SGD120m for 50MHz of 1800MHz spectrum and 40MHz of 2.5GHz spectrum, split into two payments (SGD40m in 2015 and SGD80m in 2017). This is below our estimate of SGD150m.

EPL cross-carriage upheld; chance to reverse subscriber loss. SingTel has lost its appeal to exclude the next three seasons of EPL from the cross-carriage rule. StarHub will be able to broadcast EPL on a standalone basis for SGD59.90 monthly (SingTel’s price). Assuming StarHub’s bundled pricing (to be announced) is competitive, we think it quite likely that it will be able to stem market share loss as SingTel’s subscription fee is 72% above the previous bundle cost of SGD34.90 and much of SingTel’s content is also available on StarHub. However, the cost of bundling may restrict margins in 3Q13.

Should pay higher dividends. Given lower spectrum cost, extra breathing room given by EPL cross-carriage and low net debt/EBITDA of 0.4x, there is scope for StarHub to raise its FY14 dividend from the current SGD0.20/share promised for FY13. On our forecasts, StarHub should generate FCF per share of SGD0.24-0.25 a share in FY14-15, enough to fund a slightly higher DPS. In the past (2007-2011), they have tended to raise dividends in increments of 1-2 cents. StarHub will only announce its future dividend early next year after full year results.

Source: Maybank Kim Eng Research - 1 Aug 2013