We downgrade StarHub to Neutral as risk-reward appears balanced ahead of the bid for English Premier League (EPL) broadcasting rights in 2H09. We are trimming our PO 5cps, to S$2.05 as we factor structurally higher content cost. We recommend switching to SingTel where stub is 20% less expensive on EV/EBITDA but has superior earnings growth of 3% for CY10.
The market is currently pricing in ~75% chance of StarHub winning the EPL bid, based on our valuation range for EPL outcomes. We value StarHub at S$2.25/shr if it wins the bid and S$1.75/shr if it loses. Our PO of S$2.05/shr assumes 60% probability that StarHub wins. If StarHub loses EPL and drops to a price of around S$1.60 per share (roughly 10% discount to S$1.75/shr, 11% yield), we would revisit our opinion.
We forecast StarHub’s earnings to decline 0-3%, for FY0-11. Mature markets (mobile & penetration rates are >100%) and stronger offerings from SingTel (mobile & pay TV) mean StarHub will find it tougher to grow its top-line. Competition for content from SingTel should translate into structural margin pressure at StarHub and risk of eventually losing some key content, e.g. EPL.
StarHub has a yield of ~8% vs government bond yield of <3%, making it one of the most attractive yield stocks in the region. Mgt is committed to a dividend payout of S$0.18/shr p.a. (payable qtrly). This is backed by mgt’s strong track record of returning capital to shareholders and FCF coverage of 1.2x for 2010E.
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