StarHub (STH SP) - Maybank Kim Eng 2017-04-05: Post-GSA, cut TP 5%/DPS 13-38%

STARHUB LTD CC3.SI

StarHub (STH SP) - Post-GSA, cut TP 5%/DPS 13-38%

The IMDA has concluded Phase 1 of the General Spectrum Auction (GSA) after three days of auctions.
Excess demand of 50MHz from the incumbent telcos and newcomer TPG (TPG AU, Not Rated) led to frenzied bidding for the 175MHz of spectrum available and a final price premium of 560% per lot for the non-reserved 900Mhz spectrum, 370% for 700MHz and 297% for 2.5GHz.

To pay for the higher-than-expected spectrum cost, StarHub needs to lower FY18-19E dividends by 13-38% to keep gearing levels below the estimated comfort level of 1.8x net debt/EBITDA, with the result that yields will become a pedestrian 3.5% by FY19.
We lower DCF-TP by 5% to SGD2.36 (WACC 5.5%, LTG 0.5%). Maintain SELL.

StarHub got the 10MHz of 900MHz spectrum that it is entitled to at the reserved price of SGD20m per 2x5MHz lot under the First Right of Refusal. It also bid and won 30MHz of 700MHz spectrum for SGD94m per 2x5MHz lot, as well as 20MHz of 2.5GHz spectrum for SGD11.9m per 5MHz lot. In total, it will pay SGD349.6m. This is higher than our expected SGD109m.
IMDA has not yet made known when the spectrum has to be paid for.
For our forecasts, we have assumed that the 900MHz and 2.5GHz will be paid this financial year but the 700MHz will be spread equally over FY18-19 as it will not be immediately available and may not be until 2020 when Singapore, Brunei, Indonesia and Malaysia fully switches over their TV broadcasting from analog to digital.

To pay for the higher-than-expected spectrum cost, StarHub needs to lower FY18-19E dividends by 13-38% to keep gearing levels below the estimated comfort level of 1.8x, with the result that yields will become a pedestrian 3.5% by FY19.

Merger or collaboration with M1 could add heft and resources to compete against Singtel and fourth mobile operator.
Move to boost Enterprised Fixed revenue via more industry verticals such as healthcare could lead to faster growth in a high-margin segment.

Could lose some mobile market share to a new entrant.
M1 is expected to lose the most.
Greater-than-expected rise in operating costs could lead to even greater squeeze in margins, further endangering dividends.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-05

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 2.36 Down 2.49