StarHub (STH SP) - 4Q16 Growth From Broadband As Well As Data And Internet
- StarHub’s 4Q16 results were below expectations due to higher handset subsidies, less grants from NGNBN and a one-off provision for restructuring.
- Management is working towards a formal agreement on network sharing with M1, after which the two companies could proceed to other avenues of collaboration.
- Management has realistically cut dividends from 5 S cents to 4 S cents/quarter for 2017.
- Maintain BUY with a lower target price of S$3.22.
- StarHub reported net profit of S$54m for 4Q16 (-33.2% yoy), below our expectation of S$79.4m due to:
- higher handset subsidies of S$91.4m (4Q15: S$72.7m) as StarHub trimmed ASPs for smartphones,
- lower grants from Next Generation Nationwide Broadband Network (NGNBN) of S$4.6m (S$13.8m), and
- a one-off provision for restructuring of S$9m (staff costs).
Mobile: Suffering contraction in pre-paid ARPU.
- StarHub registered a healthy pace of net additions of 14,000 for post-paid and 18,000 for pre-paid. Post-paid ARPU declined slightly by 2.8% yoy to S$70.
- Pre-paid ARPU contracted by a significant 11.8% yoy to S$15 due to lower usage for voice and iDD.
- Post-paid revenue grew 2.4% yoy due to steady expansion of subscriber base. Unfortunately, pre-paid revenue contracted by a hefty 11.8% yoy due to lower ARPU.
Pay TV: Competition from alternative viewing options.
- StarHub lost 9,000 pay-TV subscribers but ARPU was stable at S$51 in 4Q16. It was able to maintain stable revenue on a sequential basis due to contribution from advertising. Management is also working towards trimming down cost of content for less popular channels.
Residential broadband: Positive impact from migration to fibre.
- StarHub lost 2,000 subscribers but ARPU was stable at S$37, helped by migration to high-speed fibre broadband.
Enterprise fixed: Starting to gain traction.
- Revenue from data and internet grew 10.6% yoy, driven by healthy take-up for managed services and leased circuits.
- Revenue from the voice segment increased marginally by 1.5% yoy due to growth from iDD calls.
One-off increase in staff costs.
- Staff costs increased 11.4% yoy due to a one-off provision for restructuring worth S$9m.
Guided dismal outlook for 2017.
- Management guided that service revenue for 2017 would be similar to 2016’s. EBITDA margin is expected to contract to 26-28% (2016: 31.2%) due to higher costs for customer acquisitions (handset subsidies), less adoption grants from NGNBN and the negative impact of a stronger US dollar on payments for smartphones and content.
- Capex is expected to be 13% of total revenue (exclude spectrum payments).
New dividend policy addresses threat from 4th telco.
- StarHub has realistically reduced its dividends from 5 S cents to 4 S cents per quarter for 2017. We had previously expected StarHub to cut dividends to 4.5 S cents in 2018 and 4.0 S cents in 2019.
- Management has brought forward the reduction in dividends and expects the new level of dividends to be sustainable based on outlook for cash flows over the next three years.
Working toward a formal agreement on network sharing.
- Network sharing allows StarHub to ensure that it provides the best-in-class mobile coverage while simultaneously minimising capex and opex. Going forward, StarHub would compete and differentiate itself based on service quality.
- The MOU with M1 allows the two companies to commence discussions and engage regulators. Management will focus on finalising the framework for network sharing, leading to the signing of a formal agreement. Thereafter, the two companies could proceed to discuss other avenues of sharing and collaboration beyond mobile.
Trial 5G technologies.
- StarHub and Nokia have demonstrated ultra-high data speed of 4.3Gbps and latency of just 1ms using Nokia’s AirScale platform on 5G cmWave technology. The platform allows the simultaneous run of 3G, 4G and 5G technologies across different spectrum bands, but uses the same radio access network (base stations).
- 5G will enable new virtual reality and augmented reality applications. It will also facilitate machine-to-machine (M2M) communications, such as autonomous driving.
Renewed partnership with Vodafone.
- StarHub and Vodafone have renewed their strategic partnership for another three years. Under the agreement, StarHub’s mobile customers can enjoy voice and data roaming on Vodafone’s 4G networks.
- Similarly, Vodafone’s mobile customers can roam on StarHub’s 4G LTE-Advanced network. The partners will also collaborate to service multinational companies to meet rising demand for unified communications and enterprise services.
- We cut our net profit forecast for 2017 by 11% and 2018 by 12% due primarily to higher handset subsidies.
- We expect handset subsidies to increase from S$260m in 2016 to S$305m p.a. in 2017 and 2018 as StarHub seeks to lock in customers into 2-year mobile service contracts ahead of competition from new entrant TPG Telecom.
- We see the higher handset subsidies as a "New Normal" as competition intensifies.
- Maintain BUY. We have lowered our target price to S$3.22 based on DCF (COE: 6.6% and terminal growth: 1.5%).
SHARE PRICE CATALYST
- StarHub’s dividend yield has improved to 5.3% after the recent steep correction.
- Savings in capex from sharing of mobile infrastructure with StarHub.
- Share price could have already factored in negative impact from entry of TPG Telecom as the 4th mobile operator.