StarHub (STH SP) - UOB Kay Hian 2017-03-09: Arduous Journey, Uphill Battle; Downgrade To HOLD

StarHub (STH SP) - UOB Kay Hian 2017-03-09: Arduous Journey, Uphill Battle; Downgrade To HOLD STARHUB LTD CC3.SI

StarHub (STH SP) - Arduous Journey, Uphill Battle; Downgrade To HOLD

  • Work on network sharing with M1 is ongoing and a deal could be struck by 4Q17. However, TPG could launch fibre broadband services as early as 2H17 to build its branding in Singapore as a prelude to launching mobile services in 2018. 
  • StarHub is more susceptible due to its larger base of 473,000 residential broadband subscribers. 
  • Downgrade to HOLD. Target price: S$3.10. Entry price: S$2.80.



WHAT’S NEW


Forging a win-win outcome through network sharing. 

  • StarHub and M1 intend to share radio access (base stations) and backhaul transmission network in a comprehensive manner across 3G, 4G and 5G. The two companies are likely to appoint a third-party consultant to advise them on the integration of two separate mobile networks.
  • We anticipate protracted negotiations and expect a definitive deal could only be signed in 4Q17.
  • 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.

Anticipating TPG’s next move. 

  • Management anticipates that TPG could launch fibre broadband services in 2H17, leveraging on their strength and expertise in fixed-line network in its home ground in Australia. This serves to build TPG’s branding in Singapore before it launches mobile services in 2H18.

TPG in currently hiring to build its Singapore team. 

  • Its planned capex of S$200m-300m is perceived to be “not aggressive”. TPG is expected to offer SIM-only service plans, given its no-frill branding and culture in Australia. Offering packages bundled with subsidised smartphones would place a heavy burden on working capital.
  • Management would focus on retaining customers in 2017 and 2018 via providing existing customers with vouchers and discounts.

Cutting expenses wherever possible. 

  • StarHub intends to streamline and right-size its operations to reduce operating expenses. It has outsourced certain finance functions in 4Q16, which resulted in retrenchment and one-off provision of S$9m for restructuring.
  • The company will continue to explore other avenues to reduce operating expenses.

Selective acquisitions to beef up capabilities in fixed enterprise. 

  • StarHub has a cash hoard of S$285.2m as of Dec 16. So far, it has utilised the proceeds from its S$300m Medium-Term Note programme to invest S$18m in an 8.8% stake in mm2 Asia in Jun 16.
  • Management would consider M&As for adjacent businesses within the fixed enterprise space, such as cyber security.


STOCK IMPACT


An arranged marriage. 

  • The probability of StarHub and M1 proceeding to share a common radio access (base stations) and backhaul transmission network is high as both companies share the same set of equipment vendors, namely Huawei and Nokia. 
  • With the mobile landscape getting more competitive, StarHub and M1 are forced to collaborate.

Share price has retraced massively. 

  • The entry of TPG has introduced heightened uncertainties. StarHub‘s share price has collapsed 42% from its peak at S$4.73 to the recent trough at S$2.75. Its dividend yield has hence improved to 5.6%. 
  • StarHub benefits relatively less from network sharing as mobile accounted for a smaller 55% of its service revenue in 4Q16 (M1: 78.8%).


EARNINGS REVISION/RISK

  • We trim our 2017-18 net profit forecasts by 0.8% and 1.7% respectively due to competition in the residential broadband space.


VALUATION/RECOMMENDATION

  • Downgrade to HOLD with a lower target price of S$3.10, based on DCF (COE: 6.6% and terminal growth: 1.5%). 
  • Entry price is S$2.80.


SHARE PRICE CATALYST

  • StarHub’s dividend yield has improved to 5.6% after the recent steep share price correction.
  • Savings in capex from sharing of mobile infrastructure with M1.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-09
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 3.10 Down 3.220



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