Starhub

Kim Eng on 11 Jul 2012

Time to say goodbye. Our long-standing buy call on StarHub has been rewarding. However, it is time to say goodbye and we advise clients to take profit. The stock has raced to an all-time high amidst the current risk-off environment and its dividend yield has compressed to the lowest level since listing. Going by our DDM model, the share price has already discounted a 20% rise in dividends, but our original expectations of higher dividends may be dashed by an upcoming 4G spectrum auction in 2013. Management has also indicated there will be no capital management or reduction initiatives. Assuming dividends stay flat at SGD0.20 a share, our DDM-derived target price is SGD3.04 or 15% below the current level. SELL into the current strength.

Stock is overvalued if dividend stays put. StarHub has almost reached our DDM-derived TP of SGD3.64, which had assumed a 20% rise in annual dividends to SGD0.24 a share. However, the 4G spectrum auction in 2013 may lead to a rise in cash commitment next year, which could reduce the company’s willingness to increase dividend payout. If dividends stay put at the current SGD0.20 a share, the stock is now overvalued, with a DDM-derived TP of SGD3.04.

Spectrum cost to push up 2013 cash needs. Using past auctions to provide a pricing benchmark, StarHub may need to pay SGD110-131m for refarmed 4G spectrum. An auction is likely to be held in 1H 2013. This could bump up 2013 cash requirements by 43-51% and push 2013 net debt/EBITDA from 0.63x to 0.78-0.81x. While this should not endanger its current SGD0.20 DPS, it may undermine our original thesis that StarHub can afford to increase its dividends.

Absolute valuations also difficult to justify. At the current level, StarHub is yielding just 5.6% on its ordinary dividend, the lowest since it was listed in 2004 and started paying dividends in 2005. The spread between dividend yield and the 10-year Singapore government bond yield has also narrowed to its tightest level yet, a mere 400bp, since the bond itself was issued in 2007. Dividend yield is also barely hedging against domestic inflation of 5% (as at May 2012).