• +12% since 31 Mar’s upgrade
• Re-engage closer to S$3.50
• Longer-term transformation is positive

Rebound of ~12% since upgrade

Since our upgrade to Buy on 31 Mar, StarHub has made a strong recovery from S$3.31 then to a recent high of S$3.70, or about 12%. And if we add in the quarterly dividend of S$0.05 that was paid on 27 May, the total return would have been just over 13%. Having said that, the recent strong run-up also meant that the current share price has hit our DCF-based fair value of S$3.69.

Unlikely to revise our fair value yet

But at this point, we are unlikely to change our fair value. First, we believe that StarHub’s capex for the next two years may still be quite considerable, and should be close to 13% of total revenue as per its FY16 guidance.

Note that this excludes the S$80m spectrum payment due in Sep; and it may have more spectrum payments to make, depending on how much extra spectrum it can get in the upcoming auction. On this front, StarHub recently issued S$300m worth of 10-year 3.55% notes recently, which it would use to finance new acquisitions, investments, refinancing of existing borrwings, working capital, capex and for other general funding needs.

Second, the recent run-up may be due to a softening of rate hike expectations in the US, with the expected hike only likely to happen in Sep, and may be limited to just a hike this year . But even then, we see limited room for local interest rates to ease from here.

Downgrade to HOLD

With further gains from here likely limited, we downgrade our call to HOLD. We would probably look to re-engage closer to S$3.50.

That said, we think that the recent developments by the company to go into cyber security for example is a move in the right direction as it would transform StarHub from a pure carrier towards an integrated solutions provider in the fastgrowing mobile eco-system.

Source: OCBC Research - 10 Jun 2016