StarHub (STH SP) - Maybank Kim Eng 2017-03-30: Get through 2017 first

StarHub (STH SP) - Maybank Kim Eng 2017-03-30: Get through 2017 first STARHUB LTD CC3.SI

StarHub (STH SP) - Get through 2017 first


Focus points: M1, management strategy and margins 

  • We hosted StarHub at Invest ASEAN Singapore. Key highlights included: 
    1. whether it has any interest in acquiring M1; 
    2. how it plans to manage its businesses under pressure; and 
    3. the rationale behind the downgrade to its margin outlook in 2017 as well as how long the famine would last.
  • Post-conference, it announced some management appointments and changes. On balance, StarHub has a game plan to manage the changes, but it will still be turbulent times ahead. 
  • Maintain SELL with DCF-based TP of SGD2.49 (WACC 5.5%, LTG 0.5%).



1. Interest in M1? 


1.1 Not from management; its shareholder will decide 

  • Top on everyone’s mind was whether StarHub has any intention to acquire M1, as the latter’s three biggest shareholders are reviewing their stakes. Management was clear in stating that they have no intention to acquire or merge with M1 presently, but they did say that its key shareholder, ST Telemedia, which owns 56% of StarHub, will ultimately decide, given Temasek’s influence over both StarHub and M1. 
  • ST Telemedia is wholly-owned by Temasek, which is also a major shareholder of M1’s shareholders Keppel T&T and SPH. These two companies hold a combined 32.4% of M1 while Axiata owns 28.3%.

1.2 Can achieve the same goals via collaboration 

  • For its part, StarHub’s management prefers to collaborate with M1. It has already started to explore capex reduction through network sharing with M1, which could start to see cost savings within the next two years. 
  • Telcos invest in infrastructure to create barriers of entry, but if there is no need to duplicate certain parts of it, then there is scope for cost savings. M1 and StarHub use the same network equipment suppliers, Huawei and Nokia.

1.3 Spectrum hoarding will not be allowed 

  • Management noted that if it or another telco were to acquire M1, they may have to give up certain spectrum as the regulator will not permit hoarding of unused spectrum. Hence, if TPG was to acquire M1, it will likely have to give up the 60MHz of spectrum that it recently paid SGD105m for. 
  • Incidentally, TPG has confirmed that it will also participate in the General Spectrum Auction, which is expected to be held before the end of Mar.

1.4 Regulator’s prime concern will be consumer protection 

  • Management believes that the regulator, Info-communications Media Development Authority (IMDA), will be open to its collaboration with M1 as long as there is fair competition between telcos, and consumer rights are protected. 
  • We believe there should be no pushback by the regulator on network sharing as it is common by telcos in other countries to share elements of the network, such as radio access network (RAN) including base stations, and towers.
  • Management also noted that its MOU with M1 allows for further collaboration beyond network sharing, but this will be subject to regulatory approval. This includes going into the realm of platforms, such as Internet of Things. If the regulator allows it, this could mean that StarHub and M1 may share customers in areas such as Smart Homes or even Pay TV at some point in the future. In the case of Pay TV however, StarHub will need to find out whether it has the sub-licence rights to allow M1 customers to subscribe to StarHub’s Pay TV services and if it does, how much more will it cost?


2. More emphasis on high-margin biz 


2.1 Building up high-margin Enterprise & Mobile 

  • Management noted that the Enterprise Fixed and Mobile businesses give StarHub the best margins. They currently contribute a combined 68% of revenue and management intends to drive this to 75%. But no timeframe was given. 
  • One of the areas of focus will be healthcare, which has been identified as one of the key five Enterprise Fixed pillars, alongside SME, Government, Banks and Hotels. Supporting this plan will be Singapore's aging population and the government's push into making Singapore a biohub. The Ministry of Health’s recent reorganisation of the healthcare system in Singapore into three integrated clusters from six previously may result in opportunities to integrate their IT systems.
  • In Mobile, roaming is a low-hanging fruit that StarHub plans to eke out some profitability compared to none at the moment. The only way to encourage people to use data roaming instead of wifi is to make it as convenient and affordable as possible. Hence, it is the only telco in town that provides 2GB/3GB of data, valid for 30 days and useable in nine countries for just SGD15/20. In addition, its TravelEasy plans allow users to connect to any network instead of just one partner network, unlike other telcos. This gives StarHub users the advantage of always having the strongest data connection overseas. Roaming currently accounts for less than 10% of postpaid revenue.

2.2 Holding the fort in Pay TV which is under siege 

  • However, management warned that the number of Pay TV subscribers and revenue will continue to decline as Over-The-Top (OTT) viewing alternatives grow. 
  • In the past 12 months, two new streaming services Catchplay and Viu have entered the market. While StarHub has also come out with its own OTT app – StarHub Go – to counter them, management realises that TV viewers now have more incentives than before to cut the cord. However, it will not sacrifice margins to maintain revenue, which still accounted for 16% of total revenue in FY16. Instead, content cost will be controlled to ensure stable profitability.
  • When the price is right, StarHub will still acquire content but will walk away if the cost does not allow it to cross its margin threshold. NBA is one example of content where StarHub decided not to acquire as the asking price was too high. To prevent the brand’s identification with certain content IPs, it has rebranded its four sports channels under Hubsport 1, 2, 3 and 4 instead of naming it by genre, ie football, basketball and soccer, etc.


3. Management changes 


3.1 Key hires and lateral moves 

  • Following the conference, StarHub announced a key new hire to spearhead the healthcare vertical of its enterprise business, Ms Chong Yoke Sin. She will be joining as chief, enterprise business group. She was the CEO of Integrated Health Information Systems for eight years (2008- 2016) and before that, CEO of NCS Group for 12 years (1996-2007). 
  • Other moves include the re-designation of Mr Mock Pak Lum from CTO to Chief Business Development Officer and Mr Chong Siew Loong, a promotion from VP of Network Engineering to head of the division as well as CTO, while Chief Commercial Officer Mr Kevin Lim is expected to retire by end-2017.

3.2 Reflective of an industry under pressure 

  • We note that StarHub is not the only one to make senior management changes. M1 also recently announced the departure of Mr Nicholas Tan, its CFO, who was StarHub's CFO for two years before he joined M1 last year.
  • In our view, these changes are reflective of an industry under pressure.

3.3 But still speaks well of StarHub’s foresight 

  • Still, the changes made by StarHub actually speaks well of management's determination to manage the upcoming changes that are expected to be brought about by the entry of TPG as the fourth telco. This is particularly relevant in the case of the Enterprise Fixed segment where TPG will not be able to compete for business without possessing the following factors: 
    • Wide range of enterprise solutions: StarHub is building leadership in selected verticals, such as Government, SME, Banks, Hotels and Healthcare by further enhancing its enterprise solution capabilities in areas such as cloud, cyber security, data analytics and enterprise mobility. One example of a growth area is its connected living solution that it is offering to housing developers as well as helping mall owners to better run their malls with telco data analytics. 
    • Secure enterprise-grade infrastructure: Business customers need a much higher quality of connectivity, reliability and redundancy than consumer customers. Hence, StarHub has its own fibre network to connect key commercial buildings that extend its reach to enterprise customers. Companies, especially banks, are keen to work with telcos that are able to provide secure data roaming for key clients. For instance, they want to be able to use mobile roaming information to protect against fraudulent overseas credit card use. StarHub has inked data roaming agreements with all telcos in each country instead of just 1-2 partner networks per country, something that not even Singtel can match.


4. Structurally lower margins ahead 


4.1 Lower EBITDA margin guidance reiterated 

  • For FY17, StarHub has guided down EBITDA margin to 26-28%, from 31.2% in FY16. Management attributed this to the following: 
    • No more NBN adoption grants. In the past, such government grants were given to StarHub to encourage customer migration from cable to fibre. They accounted for a substantial 2% of service revenue in FY16 and almost 3% in FY15; 
    • More handset subsidies.  Two reasons – 
      1. the launches of the Samsung S8 and iPhone 8 this year; and 
      2. aggressive promotion of subsidised plans to lock in customers under 2-year contracts that will last until 2019 to pre-empt TPG’s mobile service launch in 2018; 
    • Negative FX impact from the rising USD on USD-denominated Pay TV content costs; and 
    • Heavy investments in customer service to improve customer experience and differentiate it from the competition.

4.2 Limited scope for a strong margin rebound in 2018-19 

  • Although the two big handset launches from Samsung and Apple are expected to happen in 2017, management cautioned that its evaluation encompasses the next three years and takes into account expected heavy investments in operating expenses to boost customer service as well as the loss of NBN adoption grants. As such, there appears to be limited scope for a strong margin rebound in 2018 and 2019.



Swing Factors


Upside

  • Fourth telco does not participate in General Spectrum Auction. All three incumbents keep most of their spectrum allocations.
  • Merger or collaboration with M1 could add heft and resources to compete against Singtel and fourth mobile operator.

Downside

  • Could lose some mobile market share to a new entrant.
  • M1 is expected to lose the most.
  • Greater-than-expected rise in operating costs could lead to even greater squeeze in margins, further endangering dividends.






Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-03-30
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 2.490 Same 2.490



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