April 13, 2009

StarHub’s OpCo (Nucleus Connect) emerged as the NBN OpCo winner. This is positive for StarHub, slightly negative for SingTel (~3% hit to Group earnings in 2012) & neutral for M1. We expect the win to facilitate StarHub’s ambitions for non-residential b’band growth; we do not see significant shifts for residential b’band. We maintain Buy ratings for SingTel & StarHub.

SingTel’s interest in NBN success is via its 30% NetCo stake & pressure to maximize monetization of its stake in AssetCo (Holdco of NetCo assets) by 2014. NBN OpCo will benefit from StarHub’s track record as a challenger & appetite to grow the wholesale market as opportunities in the consumer space shrink.

The NBN OpCo win gives StarHub a one-time S$250mn capex subsidy & minimum margin support of S$25 per line/mth to compete with SingTel in the non-residential market outside of the CBD. We estimate a modest 7% earnings upside for StarHub in 2012 from wholesaling opportunities & incremental ~12% market share in the non-residential market. The potential hit to SingTel S’pore earnings is ~6% (~2% hit to Group earnings). Non-residential b’band currently contributes ~12% & ~8% to StarHub & SingTel S’pore revenues respectively.

Winning OpCo bid offers wholesale price of S$21 per month for a 100MBps residential end-user connection. We estimate a potential ~1% earnings downside for StarHub & ~4% earnings downside for SingTel S’pore (~1% hit to Group earnings) on full rollout in 2012. Key reason for low earnings impact at StarHub is the offsetting benefit from the S$6 per line/mth margin earned at NBN OpCo. Our estimate assumes that 100Mbps becomes a mass mkt offering & retail pricing settling at ~S$46 per month (8Mbps pricing today). M1’s (MBOFF, B-2-8, S$1.48) upside potential is limited by the well-entrenched duopoly & >100% HH b’band penetration.

We believe StarHub’s CY09 capex guidance of <11% sales (BAS-MLe: ~S$220mn) is safe with this win. Total OpCo capex for NBN rollout is ~S$350m (StarHub: S$100m; Gov’t subsidy: S$250m) for CY09-12 while total capex for 25 years is~ S$1bn (S$750m/S$30m p.a. for StarHub, net of subsidy).

OpCo is committed to a joint rollout in accordance to NetCo’s commitment of 60% coverage by 2010, 95% by 2012 & USO from 2013. NetCo is scheduled to begin fiber deployment in 2H09. OpCo is scheduled to offer services from Apr ’10.

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