OCBC Maintains BUY on STARHUB after it wins NBN OpCo Bid

Wins NBN OpCo Bid. StarHub announced Friday that it has been selected by the Infocomm Development Authority of Singapore (IDA) to build and manage the OpCo (Operating Company) for the Next Generation National Broadband Network (NBN). StarHub plans to invest S$100m to set up a wholly-owned subsidiary Nucleus Connect (NC) to design, build and operate the active infrastructure of the NBN. In addition, NC, which is expected to start commercial operations in 1Q10, is also committed to attracting overseas online service providers to host their content in Singapore.

S$1b investment over 25 years. According to StarHub, NC expects to spend about S$1b for the active network over the 25-year period of the license, or around S$40m per year. However, NC is eligible for the government grant of up to S$250m from IDA to defray part of the investment, which we understand will also be dispersed to NC over a period of time. Based on our estimates, we do not believe that StarHub will have any issues funding the S$100m NC investment using its internal funds.

Wholesale pricing ranges from S$21-121 per user. Meanwhile, the IDA has revealed that one of the key factors behind StarHub's victory was its "attractive" wholesale pricing. Media reports quoted the IDA as saying NC will charge companies (RSPs or Retail Service Providers) S$21 a month for a 100Mbps residential Internet connection and S$121 for a 1Gbps link; a 100Mbps non-residential connection is priced at S$75 a month. The IDA added that NC's proposed wholesale pricing cannot be raised for the first six years but it can be brought down. Earlier, the NetCo (Network Company) - won by a consortium that includes rival SingTel - said it would offer wholesale prices of S$15 per month per residential fibre connection and S$50 per month per non-residential fibre connection to operating companies.

No near-term impact. In the near-term, we do not see any impact on its earnings - we expect meaningful OpCo contribution to come in from 2011 onwards; we raise our FY10 estimates by less than 0.5%. We also do not expect any change in its capex spending this year although we can expect an increase of S$30m from 2010 onwards; and we can expect a small increase in debt funding somewhere down the road. Nevertheless, based on our DCF valuation model, the win is positive for StarHub and that bumps up our fair value from S$2.78 to S$2.88. Maintain BUY