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.
At risk from fourth mobile operator but likely lower impact than M1
- 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.
Sensitivity analysis on FY18-20F earnings
- 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).
Broadband revenue expanding again
- 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.
Flat DPS assumed but there is risk of a cut to build war chest
- 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.
Maintain Hold and DCF-based target price of S$3.20
- 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.