Starhub - 1Q17: Weak trends persist
- 1Q17 results were largely in line. A lower quarterly DPS of S$0.04 was declared.
- Mobile and pay TV declined further while broadband lost its growth momentum.
- EBITDA margin fell 5.0% pts yoy, hit by higher cost of services & device subsidies.
- FY17F-19F core EPS cut by 1-10% to factor in high price of the 700MHz licence.
- Maintain Reduce with a 6% lower target price of S$2.45. Good entry point is below S$2.15 (bear case) and exit point above S$2.75 (bull case).
1Q17: Results largely in line; lower quarterly DPS declared
- Excluding one-off staff cost reversal, 1Q17 EBITDA tumbled 15.7% yoy (+6.8% qoq) on lower service revenue and National Broadband Network (NBN) grants and higher opex.
- Core EPS fell a bigger 26.8% yoy (+10.6% qoq) on higher depreciation and interest costs.
- Results were largely in line, with 1Q17 EBITDA/core EPS at 24%/24% of our FY17 forecasts (consensus: 24%/24%).
- As per its previous guidance, StarHub declared S$0.04 DPS in 1Q17, lower than in previous quarters (1Q16: S$0.05).
Continued decline in mobile and pay TV revenue
- Mobile service revenue fell 0.6% yoy (-5.0% qoq) in 1Q17 due to the decline in roaming and IDD usage, which was partly offset by higher subscription revenue from:
- 2.4% pts yoy rise in subs on tiered plans to 67.8%, and
- 4.1% yoy growth in subs base.
- Pay TV revenue fell further by 6.8% yoy (-5.9% qoq) as subs declined for the seventh successive quarter by 2.2% qoq due to the continued impact of piracy and alternative over-the-top (OTT) viewing platforms.
Lacklustre broadband revenue; fixed enterprise remains healthy
- Broadband revenue was largely flat yoy and down for the second consecutive quarter by 0.9% qoq.
- ARPU remained flat qoq (+2.8% yoy) at S$37 for the fourth quarter in a row while subs continued to trend downwards, falling 3k qoq (-0.6%), reflecting intense market competition.
- Fixed enterprise revenue rose a mild 3.0% yoy (-7.9% qoq) as higher data and internet (+6.6% qoq) was offset by lower voice revenue (-18.2% yoy).
EBITDA margins largely affected by higher cost of services
- The EBITDA margin on service revenue was down a steep 5.0% pts yoy (+3.3% pts qoq) to 28.8% (normalised for one-off staff cost reversal). This was mainly due to higher
- cost of services (NBN fiber lease, managed services in fixed enterprise and content cost), and
- device subsidies on higher sales volume.
- Given the declining pay TV subs base, StarHub accelerated the amortisation of content cost in the earlier years of content renewal, leading to the rise in content cost.
FY17F-19F core EPS cut by 1-10%
- We cut FY17F-19F core EPS by 0.8-9.5% due to higher amortisation and interest cost arising from the high price of S$282m for the 700MHz (2x15MHz) spectrum, which is likely to be paid in 2H18.
- Post the revision, we forecast EBITDA/core EPS to decline at 3-year CAGR of 3.9%/13.2% between FY16 and FY19F.
Maintain Reduce with a 6% lower DCF-based target price of S$2.45
- Factoring in the higher-than-expected spectrum payments, we lower our DCF-based target price by 5.8% to S$2.45 (WACC: 7.1%) and maintain our Reduce rating.
- Its 15.8x FY17F EV/OpFCF is at a 7% discount to the ASEAN telco average, which we think is justified given its future earnings risk.
- A good entry point would be below S$2.15 (bear case) and exit point above S$2.75 (bull case).
- A key upside risk is lower-than-expected impact from the entry of TPG.