We hosted StarHub at our recent Asean Conference in Singapore. The company was represented by its Investor Relations and Corporate Communications Head, Jeannie Ong and Senior Manager of Investor Relations, Eric Loh. There were a good number of meeting requests with questions centered on its dividend prospects, capital management opportunities and the upcoming bid for the 2013-2016 season of the BPL. Surprisingly, there were little questions on its mobile segment despite the decent showing in 1Q2012.

Keeping its gun-powder dry. Starhub prefers to grow its dividends progressively in order to provide greater certainty to investors looking for sustainable returns. While management acknowledged the potential for capital management due to its under-leveraged balance sheet (net debt/EBITDA of 0.6x), it prefers to keep its 'gun-powder' dry due to: (i) regulatory uncertainties, (ii) the upcoming bid for the BPL, and (iii) intense mobile competition, with device subsidies in the market remaining high. Starhub reiterated its 20 cents/share dividend commitment for FY12, which translates into a net yield of 6%. Assuming a target net debt/EBITDA of 0.8-1.2x, we estimate the scope for an additional 13-30 cents/share on top of its recurring dividend. Starhub remains the only telco that pays quarterly dividends, which we reckon is one of the key attractions of the stock.

Pricing data correctly. We think it is a matter of time before Starhub revises its data plans. Management had earlier guided that it would look to re-price its data plans but did not elaborate further. Recall that SingTel had in early June lowered the data cap on its 3G mobile data plans and unveiled new LTE smartphones to better monetize data traffic. We expect Starhub to introduce a new set of data plans by capitalizing on the successful multi-SIM plans introduced where data caps are lower. We gather from management that SingTel's move to cut its data caps has possibly irked some of its high usage data subscribers, resulting in higher churn.

BPL ' back into the game? Starhub is evaluating options ahead of the bidding exercise for the BPL which starts in September. It lost the rights to the current season in 2009 when Singtel paid a record ~SGD400m to wrestle the iconic content from Starhub to boost its IPTV franchise. We expect Starhub to bid rationally, having learnt from the previous bidding exercise and with the benefit of the new cross-carriage ruling which requires that all exclusive content be shared. In the worst-case scenario that Starhub is not able to procure the BPL (with Singtel maintaining its exclusivity), the telco is still able to offer BPL to its pay-tv customers via the cross-carriage arrangement with Singtel. We think Starhub is open to a joint bid to reduce the overall financial impact, with management citing the staggering 70% premium paid by British Telecom (BT) and British Sky Broadcasting (BSkyB) recently for the 2013-2016 broadcasting rights (see Table 1) which cost a record GBP3.02bn (SGD6bn). Despite not having the BPL over the last 3 years, Starhub's pay-tv base has continued to grow, rising from 541k in 2Q2010 to 544k in 1Q2012, indicating that subscribers continue to appreciate its other non-sports related content.

Domestic M&As. Starhub does not rule out domestic M&As if the business makes sense and is synergistic to its existing quad play model. It has no intention to venture overseas with strategic investments a prerogative of its controlling shareholder which had invested in a few notable telco assets in the region. We think some acquisition activities may present within the broadband and content space, allowing Starhub to enhance its market position and competitive advantage.

Maintain NEUTRAL. We raise our DCF fair value on the stock to SGD3.10 (from SGD2.80) after factoring in the improved cash position and ascribing a lower WACC of 8% versus 8.5% previously to reflect efforts made to optimize its balance sheet. Starhub's share price has gained 18% YTD, outperforming the STI by 13%. We think valuations (at current levels) on FY13 PER and FY13 EV/EBITDA of 18x and 9x respectively have priced in the upside from its attractive dividend yield of 6%. The PER and EV/EBITDA comps are now higher than the historical average of 15x and 7x respectively. Further upside should be capped by concerns over potential margin erosion from the BPL and continuing high device subsidies offered.

Source: OSK