StarHub - A New World by DBS Vicker

StarHub’s FY05 results on 23 Feb will announce its first year of profitability since
listing. Momentum continues to be strong, with FY06 EBITDA and EPS projected to
grow by 12% and 26% (net of legal liabilities), respectively. The mobile division
operates in a benign competitive environment, while revenue from the provision of
broadband services continues to grow strongly. The wild card here remains the
cable TV unit, which we believe is still unprofitable. Despite competition from IPTV
operators, we see StarHub’s cable TV’s operating leverage starting to improve as
subscriber growth, although not spectacular, has been steady for the past three
years. With cash flow highly visible, and an underleveraged balance sheet, there is
a possibility of a bumper payout for FY06. Maintain Buy with a 1-year target price of
S$2.48, up from S$2.44 previously.
• Launch of the DVR set top box. StarHub should be announcing the launch of the DVR STB
sometime soon. While a direct purchase method has been suggested, we find it unlikely as this
will mean upfront expensing of the STB, and at US$339 per box, take up rate might be low. With
a rental/subscription scenario, the STB is more likely to be part of the value proposition offered
by StarHub that could potentially result in increased customer loyalty, lowered churn, and
hastened digital conversion.
• Low threat posed by M2B World. M2B’s content focus is markedly different from StarHub’s,
thus we do not see them competing for the same customers. As such, the threat posed by M2B
to StarHub’s current subscriber base seems minimal.
• Share overhang an opportunity to accumulate. We have factored in S$40m for legal
damages in FY06 on top of the provisions StarHub made in FY04, and we do not think the
actual damages will exceed our expectations. The stock has been hit hard the past week as the
moratorium on MediaCorp’s remaining 7.6% stake is due on 9 Apr, and the market played out
the share overhang angle. We believe price weakness could persist in the short term,
representing a good opportunity to accumulate on weakness. Maintain BUY, with 1-year target
price of S$2.48.
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