Starhub - 4th Telco Impact Priced-In
- Volatile sovereign bond yields.
- Yield spread at ~1SD above 5-year mean.
- Maintain HOLD with lower FV.
Rate hike in Dec seems like a certainty
- Donald Trump’s victory in the U.S. presidential elections has led to volatility in the market and resulted in the fall in bond prices and spike in yields, likely due to concerns over more intense inflationary pressures. The market seems to expect his expansionary fiscal policy plans to benefit the U.S. economy.
- A month ago, the implied probability of a rate hike in Dec stood at 80%. Today, this probability stands at 100%. Correspondingly, with the rise in treasury yields, we also noted that Singapore Government bond yields, SOR and SGD interest rate swaps have risen alongside as well. As a result, the “yield-play” counters, including Starhub Ltd (Starhub), have taken a hit.
- We believe IMDA’s announcement a week after election day on the pre-qualification of two companies to participate in the auction for new entrant spectrum exacerbated the pullback in Starhub’s share price over the past month.
Forward dividend yield trading at +1.9SD 5-year mean
- With Singapore Government 10-year bond yield and Starhub’s forward dividend yield currently trading at close to 0.6SD and 1.9SD above their 5-year mean, respectively, we note that yield spread is also trading close to 1SD above its 5-year mean, comparing the two data points.
- That said, in our view, we believe market has already priced-in the 4th Telco entry, as we deem Starhub’s current share price as fairly valued.
Updating risk-free rate assumption to 2.6%
- Hence, on higher interest-rate environment, we update our risk-free rate assumption from 2.0% to 2.6%.
- While valuations may seem undemanding at the moment, we believe this is justified for Starhub, which in our view is fairly valued, given the 4th Telco impact. Hence, as we lower our FV from S$3.30 to S$3.05, maintain HOLD, supported by 6.8% FY16F dividend yield.