StarHub (STH SP) - UOB Kay Hian 2016-11-03: 3Q16 Sustainability Of Dividend Policy At Risk

StarHub (STH SP) - UOB Kay Hian 2016-11-03: 3Q16 Sustainability Of Dividend Policy At Risk STARHUB LTD CC3.SI

StarHub (STH SP) - 3Q16 Sustainability Of Dividend Policy At Risk

  • Mobile and pay-TV businesses continued to be under pressure while residential broadband and fixed enterprise businesses have progressed sideways. 
  • StarHub’s dividend policy of paying out 5 S cents per quarter and 20 S cents per year is at risk of downgrade as grants from NGNBN taper off and competition intensifies with the potential entry of a fourth mobile operator. 
  • Maintain SELL. Target price: S$2.40.



RESULTS

  • StarHub reported net profit of S$86m for 3Q16 (down 27.6% yoy), below our forecast of S$101m.
  • Mobile: Both post-paid and pre-paid revenues contracted. Mobile revenue was down 3.6% yoy (post-paid: -2.4%, pre-paid: -10.7% yoy). Post-paid ARPU declined by 2.8% yoy to S$69 due to reduced contributions from roaming and iDD. Pre-paid ARPU declined by 11.1% yoy to S$16 due to lower usage for voice and iDD.
  • Pay-TV: Competition from alternative viewing options. StarHub lost 11,000 pay-TV subscribers, the fifth consecutive quarter of sequential contraction. Management shared that a larger-than-usual proportion of its pay-TV subscriber base completed their contracts. It also faces competition from alternative viewing options, such as OTT video services.
  • Residential broadband: Recovery reached a plateau. StarHub gained a paltry 2,000 residential broadband subscribers while ARPU was flat qoq at S$37. 23,000 subscribers migrated to fibre broadband but it did not have a visible impact on ARPU. The penetration for fibre broadband expanded by 4.6ppt to 73.9% in 3Q16.
  • Enterprise fixed: Not much growth. Revenue from data & Internet, encompassing leased circuits and managed services, was S$85.6m, was relatively unchanged on a yoy basis. Revenue from voice declined 10.5% yoy to S$12.8m due to lower usage for domestic voice and iDD calls.
  • No commensurate decline in expenses. EBITDA margin contracted by 2.9ppt yoy to 32.8%. Cost of equipment was affected by promotion for fibre broadband, which incurred subsidies for broadband modem. Cost of services increased 3.6% yoy due to higher costs for fixed enterprise services. Other expenses also experienced hefty increases due to costs for hedging, higher license fees and provisions for stock obsolescence.


STOCK IMPACT


Maintains muted outlook for 2016. 

  • Management maintained its guidance that service revenue for 2016 would be flat. EBITDA margin is expected to be about 32%. Capex is expected to pick up in 2H16 and account for 13% of total revenue for 2016 (excluding spectrum payment of S$80m).

Dividend policy at risk. 

  • StarHub intends to maintain its dividend policy of paying out 5 S cents per quarter and 20 S cents per year for 2016. This longstanding dividend policy is at risk of potential downward revision going forward due to: 
    1. grants from NGNBN have reached its tail-end, and 
    2. we expect increased competition with entry of the fourth telco.

Expect competition to intensify. 

  • Infocomm & Media Development Authority (IMDA) has delayed the completion of its assessment for the three expressions of interest submitted by MyRepublic, airYotta and TPG Telecom by another 20 business days (second extension). This means that IMDA may announce the pre-qualified candidate(s) by end-November, and the new entrant spectrum auction could be conducted in December, at the earliest.
  • The mobile industry has been a cosy oligopoly and unaccustomed to free competition.
  • The entry of a fourth mobile operator would cause major disruption.

Cyber attack on StarHub. 

  • The distributed denial-of-service (DDOS) attack that affected StarHub’s broadband infrastructure was traced to malware-infected webcams or routers owned by its customers. The attack occurred in two waves on Saturday (22 October) and Monday (24 October). Its residential customers were affected but its enterprise customers were not affected. 
  • StarHub has installed additional server capacity to guard against future attacks. It has run the extra mile by sending technicians to customers’ homes to help clean up their infected devices.

Expect uninspiring reception for iPhone 7 and 7 Plus. 

  • The iPhone 7 and 7 Plus are seen as unspectacular and not worthy to be considered a full upgrade, which occurs every two years. 
  • Despite being equipped with a new solid-state home button, the latest iOS 10 operating system, the usual improvements to higher speed, more storage, longer battery life and better cameras, they look indistinguishable from the iPhone 6S and 6S Plus. They are just a stop-gap placeholder for the eventual release of iPhone 8, scheduled next year to coincide with the iPhone’s 10th anniversary.


EARNINGS REVISION/RISK

  • We further cut our net profit forecasts for 2016 by 4.4% and 2017 by 5.9% due to the continued pressure on its mobile and pay-TV businesses.


VALUATION/RECOMMENDATION

  • Maintain SELL. We have lowered our target price to S$2.40 based on DCF (COE: 7.5% and terminal growth: 1.5%).


SHARE PRICE CATALYST

  • Attractive dividend yield of 5.9%.
  • Erosion for mobile and pay-TV businesses.
  • Risk from potential entry of a fourth mobile operator




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-03
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 2.40 Down 2.620




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