StarHub - The Litmus Test On Hubbing
- We cut FY17-19 forecasts to build in stronger impact from the fourth entrant and cessation of the fibre adoption grant.
- Over half of StarHub’s revenue/EBITDA is predisposed to competition from TPG Telecom (TPG), which could look to replicate its successful fixed broadband business in Australia, potentially also thwarting StarHub’s broadband segment.
- There remain concerns on the company’s ability to uphold its recurring DPS of 20 cents/share from the decline in FCF.
- Our DCF TP is lowered to SGD2.82 (from SGD3.75, 0.5% upside) with NEUTRAL call maintained.
Hubbing strategy put to the real test.
- Over 50% of StarHub’s service revenue and EBITDA are derived from the mobile segment, which renders it susceptible to competition from the budding fourth mobile entrant, TPG, which is slated to unveil attractively priced and innovative plans by 2018.
- That said, downside risk to earnings would likely be mitigated by the ability to bundle its mobile service (with its pay-TV and/or fixed broadband service), which aids in customer retention.
- The group’s hubbing scorecard (the number of households taking up two or more services) stood at 58.4% in 3Q16, down from 59.9% a year earlier.
Enterprise scaling up nicely.
- We expect enterprise revenue to grow at a steady CAGR of 8.3% for FY16-FY18 vs 2% in FY15, from higher adoption of fibre services and increased demand among verticals for smart services, data analytics, cloud and cyber security solutions.
- StarHub is already a leader in enterprise solutions for the hospitality sector and holds a 90% share in this segment. Enterprise revenue has grown to be the second largest revenue contributor to the group, at 16.8% in 3Q16, overtaking pay-TV revenue.
- Enterprise EBITDA margin is comparable – if not superior – to mobile margins, which should provide good earnings uplift in the longer term.
Fibre adoption grant to ease further.
- Management previously guided that the Next Generation National Broadband Network (NGNBN) fibre adoption grant will taper off in FY16 with a 1% impact on full-year EBITDA margin. It booked a grant of SGD7.1m in 3Q16 (classified as other income) from SGD7.9m in 2Q16 (9MFY16: SGD27.6m). The grant totalled SGD45.6m in FY15 and SGD46.5m in FY14, coinciding with the upswing in fibre migration.
- Based on the earlier guidance, we project the grant to decline further to c.SGD6m in 4Q16.
Forecasts and risks.
- We cut our FY17-19 core earnings forecasts by 4.9%, 18.1% and 21.1% respectively, after building in stronger ARPU dilution of 15- 20% (vs 10-15% respectively) and margin pressure from greater retention activities.
- Additionally, we tone down our DPS expectations post FY17. Our FY18-19 forecasts are now 10-16% below consensus.
- The key risks to our forecasts are weaker-than-expected margin, stronger-than-expected competition from the fourth entrant and dividend disappointments.
- StarHub’s share price has fallen 23% YTD on concerns over the fourth entrant and earnings risks.
- Valuation-wise, the stock trades at -1SD of its five-year historical EV/EBITDA mean of 9x. The share price is likely to find support from the decent prospective dividend yield of over 7%.