We are initiating coverage with a Buy recommendation and target price of $2.40. StarHub is the second largest telco and the only true quadruple-play telco in Singapore with mobile, broadband and television services delivered over fixed-line and wireless.

Quadruple play allows StarHub to build customer loyalty, reduce churn and gain market share. It is the dominant player in the Pay TV arena with an overwhelming 90% market share over SingTel. In fixed broadband, it’s 38% market share is second to SingTel but with a downlink speed of 100Mbps, it is still the fastest Internet access provider in Singapore.

Despite winning the OpCo bid, StarHub has stuck to its guidance on capex and dividend. We do not expect total capex to exceed 13% of revenue in the next five years. Besides, deployment of the network will also attract government funding of $250m while the bulk of the OpCo capex will be success-based, to be spent only when there is demand.

StarHub focuses heavily on FCF, fully aware that investors value its generous dividend. It has committed to keeping dividend at $0.18/share this year, which yields a very attractive 10%. In future, we estimate it can double current capex and still afford the dividend. Also, with a net debt-to-EBITDA ratio of only 1.2x, it has ample access to credit.

At 10x FY2009 earnings, StarHub is trading below the trough of its P/E band. At our blended target price of $2.40, StarHub would be valued at a reasonable 13x FY2009-FY2011 average forecasted earnings. We have pegged our immediate target to 11x FY2009 earnings, which is still below the average 14x P/E of other integrated telcos in the region.