Starhub - CIMB Research 2016-12-05: Not a starry-starry night

STARHUB LTD CC3.SI

Starhub - Not a starry-starry night

Starhub’s mobile business is at risk of being negatively affected from FY18F onwards by the entry of a fourth mobile operator.
The impact on Starhub is likely to be less severe than on M1 as mobile accounts for only 56% of FY16F service revenue and it is able to bundle quad-play services.
Maintain Hold and DCF-based target price of S$3.20.

While already exhibiting flat to slightly declining revenue in FY16-17F, StarHub’s mobile business is at risk of further negative impact from FY18F onwards from the entry of a fourth mobile operator.
Nevertheless, the impact on StarHub is likely to be less severe than on M1 as the mobile business accounts for only 56% of its FY16F service revenue (estimated 71% of EBITDA) and its ability to bundle quad-play services puts it in a stronger position to defend mobile market share.

We have factored in a negative 15% impact on StarHub’s mobile ARPU in FY18-20.
The impact would be worse, in our opinion, if the new entrant employs highly aggressive pricing strategies, or milder if the new entrant’s execution is poor (network, branding).
Our sensitivity analysis suggests that our FY18-20F net profit forecasts for StarHub would be cut by 14-47% if its mobile ARPU is negatively affected by 30% (bearcase), or raised by 9-22% if the negative impact on mobile ARPU is only 5% (bullcase).

On the positive side, StarHub’s broadband business has resumed positive revenue growth since 3Q15. From a low base, broadband ARPUs have gradually risen as subs upgrade to higher speed plans. Nevertheless, competition remains intense with little subs growth.
We expect StarHub’s residential broadband segment to register revenue growth of low- to mid-single digits over the next three years.

Overall, we forecast EBITDA to be flat in FY16F, before rising by a modest 3.4% in FY17F due to lower handset subsidies. In FY18F, we expect EBITDA to fall by 9.8% due to competition from the fourth mobile operator.
We do not expect StarHub to raise its annual S$0.20 DPS as FCF/share is likely to stay at S$0.15-0.20 in FY16-18F due to high capex and spectrum payments. There is risk of a dividend cut should StarHub decide to build a bigger war chest to fend of competition from the fourth participant, in our view.

We maintain our Hold rating with a DCF-based target price of S$3.20 (WACC: 7.1%) on Starhub. Its 11.8x FY17F EV/OpFCF is at a 16% discount to the ASEAN telco average, which is required to compensate investors for future earnings risk.
Key upside/downside risk is better/worse-than-expected impact from the entry of a fourth mobile company.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 3.200 Same 3.200