Losing The Twinkle - StarHub
- StarHub’s hubbing strategy could be put to the real test as its earnings are susceptible to the threat posed by TPG.
- Key highlights from its 4Q16 results were the 20% cut in its quarterly DPS while the EBITDA margin for FY17 has been guided to near record lows, in the absence of fibre adoption grants and the decline in FCF.
- Our DCF-based TP drops to SGD2.70 (from SGD2.82, 10% downside) after rolling our base year forward. Maintain NEUTRAL.
The litmus test on hubbing.
- Over 60% of StarHub’s service revenue/EBITDA are derived from the mobile and broadband segments. This renders it susceptible to competition from the fourth entrant, TPG Telecom (TPG), which is looking to introduce fixed broadband and mobile services to the market.
- We think the downside risk to earnings should be mitigated by the ability to bundle its mobile service with pay-TV and/or fixed broadband – which helps in customer retention.
Enterprise to the fore.
- We expect its enterprise revenue CAGR to be at a stronger 8.3% for FY17-19 (FY16: +4%), from increased demand among verticals for smart services/Internet of Things (IoT), data analytics, cloud and cyber security solutions.
- Enterprise revenue is now the second largest revenue contributor (FY16:17%) after the mobile segment (51%). Its enterprise margin is comparable, if not superior, to its mobile margin – which we believe could partially compensate for the pressure on overall EBITDA.
FY16 results fell short.
- 4Q16 service revenue grew 4% QoQ on seasonally stronger mobile revenue. This brought FY16 service revenue to SGD2.2bn, ie a 0.3% YoY contraction. EBITDA contraction accelerated to 14% YoY in 4Q16 from 10% YoY in 3Q16.
- Core earnings (adjusted for exceptional gains) fell 8.2% YoY, meeting 96% of our forecast although this was 9% short of the market estimate.
- We lower our FY17-19 numbers by 12.2%/0.4%/5.9% respectively, mainly factoring in the weaker margin guidance and some adjustments to opex (our forecast had earlier built in the impact from the entry of TPG).
- Key risks to our forecasts are weaker-than-expected margins, stronger-than-expected competition from the fourth entrant and higher-than-expected capex.