StarHub - DBS Research 2017-02-06: Lower dividends should be sustainable

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STARHUB LTD CC3.SI

StarHub - Lower dividends should be sustainable

• 4Q16 net profit of S$ 54.0m (-33% y-o-y, -37% q-o-q) was significantly below our expectations due to lower grants and higher handset subsidies.
• Guiding for lower DPS and EBITDA for FY17.
• Maintain HOLD with revised TP of S$ 2.85.

We project new entrant TPG to gain 8.5% mobile revenue share by 2022. 

• With an annual EBITDA of A$775m and net debt-to-EBITDA of 1.6x as at end-FY16 (July year-end), TPG has enough room to roll out a nationwide mobile network. Hence, we believe the impact on the incumbents from TPG’s entry will be acute, and project TPG to secure 8.5% revenue share by 2022. 
• In our bull-case and bear case scenarios for the existing telcos, we project TPG to secure 6% & 10% revenue share respectively.

Lower NGNBN grant income and handset subsidies hit bottom line.

• 4Q16 net profit of S$ 54.0m (-33% y-o-y, -37% q-o-q) was well below our expectations due to faster than expected decline in NextGeneration National Broadband Network (NGNBN) grant income and higher handset subsidies. 
• Other income decreased by S$9.2m yo-y as grant income declined. 
• On the other hand, handset subsidies rose to S$ 91.4m (+26 y-o-y, +58% q-o-q) as iPhone 7 was quite popular due to hiccups at Samsung.

Lower dividends sustainable in our view. 

• StarHub expects service EBITDA margins to drop to 26%-28% in FY17, due to lower grant income and higher costs. 
• In addition, the company has cut its dividend to 4 Scts per quarter in FY17 from 5 Scts in FY16. 
• The revised dividend levels should be sustainable in our view, considering that StarHub is likely to see cashflow improvements due to the higher level of network sharing with M1.

Valuation

• Maintain HOLD with a revised TP of S$2.85. 
• Our revised DCF-based (WACC 6.5%, terminal growth 0%) TP is S$2.85, as we factor in the contraction of earnings in the near future. The counter offers ~5% yield currently. 
• Our bull-case and bear case TPs for StarHub are S$3.24 and S$2.68 assuming 6% and 10% revenue share for TPG by 2022 respectively.

Key Risks to Our View

• Limited uptake of TPG’s services could reduce the threat to mobile market share. 
• As an inexperienced operator, TPG could struggle to deploy and maintain a network that could challenge the network quality of the incumbents. In this scenario, we expect TPG to only capture 6% of the revenue share from the incumbents. 
• Under this bull-case scenario, our TP is S$ 3.24 for StarHub.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-02-06

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.85 Down 3.010