www.dbsvickers.com Refer to important disclosures at the end of this report ed: JS / sa: JC

FULLY VALUED S$2.31 STI : 2,979.38 Price Target : 12-Month S$ 2.20 (Prev S$ 2.06) Reason for Report : Earnings Preview & Earnings revision Potential Catalyst: Quartely dividends Analyst Sachin Mittal +65 6398 7950 sachin@dbsvickers.com

Price Relative

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

3.20

3.40

2006 2007 2008 2009 2010

S$

68

88

108

128

148

168

188

208

Relative Index

StarHub (LHS) Relative STI IND EX (RHS) Forecasts and Valuation FY Dec (S$ m) 2009A 2010F 2011F 2012F

Turnover 2,150 2,223 2,264 2,303 EBITDA 654 608 656 667 Pre-tax Profit 385 313 354 363 Net Profit 320 260 294 301 Net Pft (Pre Ex.) 320 260 294 301 EPS (S cts) 18.6 15.2 17.1 17.6 EPS Pre Ex. (S cts) 18.6 15.2 17.1 17.6 EPS Gth Pre Ex (%) 1 (19) 13 3 Diluted EPS (S cts) 18.6 15.2 17.1 17.6 Net DPS (S cts) 18.4 20.0 19.7 20.6 BV Per Share (S cts) 7.0 3.7 0.8 (1.3) PE (X) 12.4 15.2 13.5 13.2 PE Pre Ex. (X) 12.4 15.2 13.5 13.2 P/Cash Flow (X) 7.0 7.5 6.9 6.8 EV/EBITDA (X) 7.1 7.7 7.2 7.1 Net Div Yield (%) 8.0 8.7 8.5 8.9 P/Book Value (X) 32.9 61.9 278.4 nm Net Debt/Equity (X) 5.7 11.7 52.4 na ROAE (%) 278.1 282.2 750.5 na Earnings Rev (%): (4.8) 6.3 7.8 Consensus EPS (S cts): 15.8 17.2 18.6 ICB Industry : Telecommunications ICB Sector: Mobile Telecommunications Principal Business: Spore-based integrated information, communications and entertainment company, providing a broad range of mobile, cable TV, broadband and f Source of all data: Company, DBS Vickers, Bloomberg

At A Glance Issued Capital (m shrs) 1,715 Mkt. Cap (S$m/US$m) 3,961 / 2,907 Major Shareholders Asia Mobile Holdings (%) 49.0 Nippon Telegraph (%) 10.0 Seletar Investment (%) 7.5 Free Float (%) 33.5 Avg. Daily Vol.(‘000) 2,475

DBS Group Research . Equity 28 Jul 2010

Singapore Company Focus

StarHub Bloomberg: STH SP | Reuters: STAR.SI

Keep an eye on free cash flow • 2Q10F results to be released on 5th August; net profit

should be in line while free cash flow may disappoint.

• Market likely to focus on the non-mobile business prospects (40% of total EBITDA) in 2H10F.

• If StarHub continues with 20 Scents DPS, equity could become negative in 2012F.

• Maintain FV with DCF based revised TP of S$2.20.

We expect 2Q10F earnings of S$65m. Compared to 1Q10 earnings of S$43m, 2Q10 should benefit from (i) S$10m higher earnings in the mobile business as handset subsidies decline; and (ii) an absence of S$12m staff bonus costs in 1Q10. Going forward, we project 3Q/4Q earnings of S$77m/S$75m respectively. 2Q10F free cash flow (FCF) may be less than S$60m. We expect higher capex in 2Q10, as 1Q10 capex of S$49m was lower than quarterly run-rate of S$75m. Plus working capital could be negative in 2Q10 as payables were high in 1Q10. A back-end loaded capex may lead to declining FCF each subsequent quarter. We project FY10F FCF of S$251m compared to dividend commitments of S$343m. We could be wrong if FY10F capex is lower than our S$300m projection (14% of service rev). However, as StarHub has S$100m capex commitment for NBN over FY10F-12F, a lower FY10F capex implies higher capex in FY11F. If StarHub continues with 20 Scents DPS beyond 2010F, group equity could become negative in 2012F. Non-mobile business would be the key focus. Non-mobile business would feel the heat from NBN and pay TV subscriber battles in 2H10F. The key question is whether gains in the corporate business can offset the loss in the consumer broadband business. We project non-mobile EBITDA to decline by 5% in both FY10F/11F. We cut FY10F earnings by 5% due to smartphone subsidies but raise FY11F earnings by 6% to reflect the revenue contribution of smartphone subscribers. As investors increasingly focus on FCF, we switch to DCF based (WACC 8.4%, terminal growth 0%) valuation, with TP of S$2.20

Company Focus

StarHub

Page 2

Our Segmental projections for next three years

Source: Company, DBS Vickers

Segmental Revenue (S$m) 08A 09A 10F 11F 12F

Mobile 1080 1094 1184 1263 1,297

Cable TV 398 405 381 339 335

Broadband 257 241 224 204 195

Fixed Network 299 317 338 361 377

Sale of Equipment 98 92 96 97 98

Total Revenue 2133 2150 2223 2264 2,303.2

Segmental EBITDA

Mobile 398 395 364 422 431

Cable TV and Broadband 145 137 122 106 104

Others 104 122 123 128 132

Elimination

Total EBITDA 647 654 608 656 667

Segmental EBITDA Margin

Mobile 36.8% 36.1% 30.7% 33.4% 33.3%

Cable TV and Broadband 22.1% 21.2% 20.1% 19.5% 19.5%

Others 34.7% 38.4% 36.4% 35.5% 35.0%

Total Service EBITDA Margin 31.8% 31.8% 28.6% 30.3% 30.2%

Company Focus

StarHub

Page 3

Income Statement (S$ m) Balance Sheet (S$ m) FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F

Turnover 2,150 2,223 2,264 2,303 Net Fixed Assets 883 911 873 832 Other Opng (Exp)/Inc 0 0 0 0 Invts in Associates & JVs 0 0 0 0 Operating Profit 408 337 377 386 Other LT Assets 356 356 356 356 Other Non Opg (Exp)/Inc 0 0 0 0 Cash & ST Invts 232 167 167 163 Associates & JV Inc 0 0 0 0 Inventory 18 19 19 19 Net Interest (Exp)/Inc (23) (23) (23) (23) Debtors 107 139 142 144 Exceptional Gain/(Loss) 0 0 0 0 Other Current Assets 132 132 132 132 Pre-tax Profit 385 313 354 363 Total Assets 1,728 1,724 1,688 1,646 Tax (65) (53) (60) (62) Minority Interest 0 0 0 0 ST Debt 219 219 219 219 Preference Dividend 0 0 0 0 Other Current Liab 658 645 659 654 Net Profit 320 260 294 301 LT Debt 694 694 694 694 Net Profit before Except. 320 260 294 301 Other LT Liabilities 37 103 103 103 EBITDA 654 608 656 667 Shareholder’s Equity 120 64 14 (23) Minority Interests 0 0 0 0 Sales Gth (%) 0.8 3.4 1.9 1.7 Total Cap. & Liab. 1,728 1,724 1,689 1,646 EBITDA Gth (%) 0.9 (7.0) 7.9 1.7 Opg Profit Gth (%) (1.1) (17.5) 12.0 2.4 Non-Cash Wkg. Capital (400) (355) (367) (359) Net Profit Gth (%) 1.2 (18.6) 12.9 2.6 Net Cash/(Debt) (681) (746) (746) (750) Effective Tax Rate (%) 17.0 17.0 17.0 17.0 Cash Flow Statement (S$ m) Rates & Ratio FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F

Pre-Tax Profit 385 313 354 363 Opg Profit Margin (%) 19.0 15.1 16.7 16.8 Dep. & Amort. 245 271 279 281 Net Profit Margin (%) 14.9 11.7 13.0 13.1 Tax Paid (6) 0 (53) (60) ROAE (%) 278.1 282.2 750.5 (6,809.8) Assoc. & JV Inc/(loss) 0 0 0 0 ROA (%) 18.9 15.1 17.2 18.1 Chg in Wkg.Cap. 35 (33) 4 (9) ROCE (%) 31.6 26.0 29.7 31.7 Other Operating CF 32 0 0 0 Div Payout Ratio (%) 99.0 132.0 115.3 117.6 Net Operating CF 692 552 583 574 Net Interest Cover (x) 17.7 14.5 16.2 16.7 Capital Exp.(net) (232) (300) (240) (240) Asset Turnover (x) 1.3 1.3 1.3 1.4 Other Invts.(net) 0 0 0 0 Debtors Turn (avg days) 20.4 20.2 22.6 22.6 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (avg days) 92.5 86.7 87.8 86.4 Div from Assoc & JV 0 0 0 0 Inventory Turn (avg days) 4.4 4.1 4.2 4.2 Other Investing CF 0 0 0 0 Current Ratio (x) 0.6 0.5 0.5 0.5 Net Investing CF (232) (300) (240) (240) Quick Ratio (x) 0.4 0.4 0.4 0.4 Div Paid (309) (316) (343) (338) Net Debt/Equity (X) 5.7 11.7 52.4 na Chg in Gross Debt 0 0 0 0 Net Debt/Equity ex MI (X) 5.7 11.7 52.4 (32.5) Capital Issues 0 0 0 0 Capex to Debt (%) 25.4 32.9 26.3 26.3 Other Financing CF (46) 0 0 0 Z-Score (X) 3.6 3.5 2.9 2.9 Net Financing CF (355) (316) (343) (338) N. Cash/(Debt)PS (S cts) (39.7) (43.5) (43.5) (43.7) Net Cashflow 106 (65) 0 (4) Opg CFPS (S cts) 38.3 34.1 33.8 34.0 Free CFPS (S cts) 26.8 14.7 20.0 19.5

Quarterly / Interim Income Statement (S$ m) Segmental Breakdown / Key Assumptions FY Dec 2Q2009 3Q2009 4Q2009 1Q2010 FY Dec 2009A 2010F 2011F 2012F

Turnover 532 537 550 557 Revenues (S$ m) Other Oper. (Exp)/Inc (61) (61) (63) (61) Mobile 1,094 1,184 1,263 1,297 Operating Profit 101 111 90 58 Cable TV 405 381 339 335 Other Non Opg (Exp)/Inc 0 0 0 0 Broadband 241 224 204 196 Associates & JV Inc 0 0 0 0 Fixed Network 317 338 361 377 Net Interest (Exp)/Inc (6) (6) (6) (5) Others 92 96 97 98 Exceptional Gain/(Loss) 0 0 0 0 Total 2,150 2,223 2,264 2,303 Pre-tax Profit 95 106 84 53 EBITDA (S$ m) Tax (17) (20) (9) (10) Mobile 395 364 422 431 Minority Interest 0 0 0 0 Cable TV 137 122 106 104 Net Profit 78 85 75 43 Broadband 122 123 128 132 Net profit bef Except. 78 85 75 43 Fixed Network 0 0 0 0 EBITDA 101 111 90 58 Others N/A N/A N/A N/A Total 654 608 656 667 Sales Gth (%) 0.3 0.9 2.4 1.3 EBITDA Margins (%) EBITDA Gth (%) (6.4) 10.5 (19.3) (35.7) Mobile 36.1 30.7 33.4 33.3 Opg Profit Gth (%) (6.4) 10.5 (19.3) (35.7) Cable TV 33.8 31.9 31.3 30.9 Net Profit Gth (%) (5.7) 9.4 (12.2) (42.9) Broadband 50.5 54.8 62.6 67.4 Opg Profit Margins (%) 18.9 20.7 16.3 10.4 Fixed Network 0.0 0.0 0.0 0.0 Net Profit Margins (%) 14.6 15.9 13.6 7.7 Others N/A N/A N/A N/A Total 30.4 27.4 29.0 29.0

Company Focus

StarHub

Page 4

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Company Focus

StarHub

Page 5

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