Tuesday, April 7, 2009

Starhub - DBS Vickers

So Starhub won the OpCo contract for the National Broadband Network.

As we had predicted previously, the IDA awarded the National Broadband Network (“NBN”) Operating Company (“OpCo”) contract to StarHub, which will establish an operationally separate entity called Nucleus Connect, to design, build and operate the active infrastructure of the NBN. The OpCo award implies that SingTel and StarHub will continue to be the two key players in the broadband arena. We have already captured the impact of NBN on various players as follows
– for SingTel, overall loss of earnings of S$100-150m, or 2-3% of Group earnings in FY11 and beyond; for StarHub, about 5% adverse impact in FY11 and beyond.

StarHub, however, remains our top pick for the sector, on valuation grounds, and sustainable 9% dividend yield, payable quarterly. While the award may not be so significant on it own, we expect renewed positive sentiment on the stock and reiterate our BUY call.

OpCo award in line with our expectations. As highlighted in our last report on SingTel (“Competition,Capex and Currency”, 16th March), we had placed our bets on StarHub winning the OpCo contract. The 3 other bidders were IntelliNet (Axia & Cisco), SingTel and
M1, and the key evaluating criteria was based on wholesale interconnect price and attractiveness of nonprice interconnect terms. Some key points of StarHub’s winning proposal are as follows:

(i) Nucleus Connect will offer monthly wholesale prices of S$21 and S$75 for residential and non-residential users, compared to wholesale prices of S$15 and S$50 offered by NetCo (“OpenNet”) to OpCo.

(ii) The OpCo is expected to start commercial operations from 1H2010, and be ready to fulfill Universal Service Obligations from 2013.

(iii) The Government will provide a grant of up to S$250m to support the OpCo, which amounts to about half the capex required over the next 3 years.

More beneficial to consumers than service providers. We reiterate our point that with the shift to regulated wholesale price, the margins for OpCo would not be great and StarHub’s existing retail broadband margins would shrink as well, with more competition from retail RSPs. However, broadband constitutes only 20% of Starhub’s earnings and impact would be limited
to about 5% of bottomline. Though M1 stands to gain from NBN by entering as an RSP, we prefer StarHub on valuation grounds, as well as sustainable 9% yield.

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