• Hit S$4.02 low recently
• Yield is more attractive
• Upgrade to HOLD

5% slide post 2Q14 results

StarHub Ltd’s share price has seen a decline of as much as 5% after the telco posted a 6% YoY fall in 2Q14 earnings (still just 0.6% shy of our forecast), as well as lowering its FY14 service revenue guidance from singledigit growth to maintain at about 2013’s level (although it has maintained its service EBITDA margin at 32%). As mentioned in our post-results report, the move came as no surprise to us as we were already poised to pare our estimates should its broadband outlook not improve.

Upgrade to HOLD on valuation ground

Also in our previous report, we said that we would revisit the stock closer to S$4 as the yield would recover back to 5%. And true enough, StarHub recently hit a low of S$4.02. While the stock has recovered somewhat since then, we believe that at current price, its yield is still the most attractive among the three telcos. Although we are retaining our DCF-based fair value at S$3.81, we upgrade our call from Sell to HOLD on valuation ground; this as we also do not expect local interest rates to see a sharp jump in the near- to medium-term.

Prospects remain muted for now

Having said that, we note that the prospects for StarHub remains muted. Besides the still intense competition in the broadband space, the pretty saturated Pay TV space, we believe that the road to lifting mobile ARPUs is likely to be a long one, despite efforts by the telcos to monetize data usage via tiered pricing plans. A recent research by Adobe1 found that as WiFi becomes more available and a lot of mobile plans become more penalizing, people are learning how to switch over to WiFi on their phones. It added that “the telcos through their data plans are essentially teaching people how to avoid mobile data charges.”

Source: OCBC Research - 10 Sep 2014