Upgrade to BUY. We think margin guidance is too conservative and StarHub can do better, especially if iPhone 5S disappoints. Also, now that BPL cross-carriage is sorted out, we think Pay TV subscriber losses will reverse as early as 3Q13. We also like the new CEO’s enterprise-oriented strategy to drive future growth and margins. The stock is now a BUY with a street-high TP of SGD5.13. Our DCF-based TP has been raised following 3-7% upward revisions to FY13-15 forecasts and a higher terminal growth rate.

Full year margin guidance is conservative. We believe StarHub is being too conservative with its FY13 margin guidance of 31%, given that (1) it has consistently beaten its own guidance, (2) we do not expect the new 2013 iPhone to change the current state of the handset market, and (3) BPL odds have shifted back toward StarHub’s favour and should enable it to reverse Pay TV subscriber losses in 2H13. We have raised FY13-15 forecasts by 2.5%/5%/7% respectively.

2013 iPhone unlikely to rock the boat. The “S” model is typically a mid-life refresh model instead of a brand-new model such as the iPhone 4 or 5. The killer features are likely to be reserved for the iPhone 6, which will not be until 2014 when Apple is widely expected to introduce phones with larger screens. We note that the impact on margins from the previous two iPhones launched has not been as bad as expected.

BPL playing field leveled. With the new rebate of up to SGD600 over two years, StarHub now has the better deals for football fans. Unless SingTel sweetens its BPL offerings further, we are optimistic that StarHub will be able to reverse its Pay TV subscriber losses. It has already done a fair job of cutting down its subscriber churn even before the latest BPL deals. As the rebate is only available until 30 Sep 2013, 3Q13 is likely to see Pay TV churn reverse into positive territory.

NDR feedback. Clients were positive on management’s strategy following a post-results NDR we hosted last week. Most still own the stock and those who had sold expressed interest in entering again after hearing the new CEO articulate his plans to emphasize the enterprise business given its superior margins. New tiered data plans with even more limited data caps will continue the positive trend of uplifting ARPUs, data contributions and margins that began last year.

Source: Maybank Kim Eng Research - 21 Aug 2013