StarHub (STAR.SI): Stable free cash flow;
potential near-term catalyst if wins OpCo
bid
Company Name: StarHub Ticker: STAR.SIPrice:
2 52-Week Price Range (S$): 3-2
Year Net EPS EPS . Dividend
To Income Diluted Growth P/E Yield
December S$ S$ Dil% X %
2007 330.40 0.19 5.56 10.53 8.00
2008 311.20 0.18 -4.16 10.98 9.00
2009E 316.24 0.18 1.44 10.83 9.00
2010E 318.40 0.19 0.68 10.75 9.00
2011E 339.42 0.20 6.60 10.09 9.00
Price Performance (absolute): 1m: -3% 3m: +7% 12m: -35%
Price Performance (relative): 1m: +8% 3m: +21% 12m: +14%
Stock Rating: B
What's changed
StarHub’s recent 4Q results were better than expected and management guided for “low
single digit” revenue growth for 2009 despite the sharp slowdown in Singapore’s
economy. We have raised our 09/10/11 earnings forecasts by 4%/4%/2% on the back of
higher revenue expectations and increase our 12-m SOTP based TP to S$2.51 (from
S$2.45). Although we think that there is risk to StarHub’s revenue growth guidance given
macro uncertainties, we are more confident that it will be able to maintain its free cash
flow (FCF) to support its S$0.18 (9% curr yield) minimum dividend guidance, due to its
low capex and stable margins.
Implications
A potential upside risk to StarHub’s FCF would be if it wins the right to build the “OpCo”
portion of the National Broadband Network (NBN). The winner should be announced this
month. Although building OpCo would increase StarHub’s capex over the next several
years, we nevertheless believe it could be a positive catalyst for the stock, as we think the
project will be value accretive. Importantly, StarHub’s management has said that it is
confident it could still meet the S$0.18 annual dividend even if it is building the OpCo. In
the event that StarHub does not win the bid, we do not believe there is meaningful
downside risk to the stock, as the market does not appear to have priced in any potential
OpCo upside.
Valuation
StarHub trades at 2009E FCF/equity and FCF/EV yields of 11.7% and 9.6%, respectively,
which we view as attractive relative to its regional peers’ yields of 8.7% and 8.5%.
Furthermore, we think that downside risk to the share price is limited, as it should be
supported by its high dividend yield of 9%. We derive our TP by capitalizing our estimate
of StarHub’s 2009E normalized FCF at 13.4x. We maintain our Buy rating (on Conviction
list).
Key risks
A large demographic shift in which foreign workers leave Singapore.
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its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment
decision.
March 13, 2009 Analyst Comment
2 Goldman Sachs Global Investment Research