StarHub (STH SP) - Maybank Kim Eng 2017-05-04: Stars Not Aligned

StarHub (STH SP) - Maybank Kim Eng 2017-05-04: Stars Not Aligned STARHUB LTD CC3.SI

StarHub (STH SP) - Stars Not Aligned


No surprises in 1Q17. Maintain SELL 

  • Maintain SELL with unchanged DCF-TP of SGD2.36 (WACC 5.1%, LTG 0.5%). 
  • 1Q17 net profit was in line with our expectation, but the trends are still negative, with the next few quarters expected to get progressively tougher with two flagship handsets either launched or to be launched and consumer competition expected to heat up. 
  • Big spectrum bills will also be coming due in the next two years and StarHub may not be able to maintain dividends that have already been reduced once.


In line but negative trends 

  • 1Q17 NP was in line at 28% of our full-year forecast, but the overall trend was negative. 
  • Mobile fell 0.6% YoY (lower IDD and roaming), while Pay TV declined 6.8% (contraction of subscriber base and content). 
  • Among the bright spots were broadband (flat) and Enterprise, which grew a pedestrian 3% despite significant management attention. 
  • Core NP fell 30% YoY on higher costs of equipment, subscriber acquisition and content. If not for a one-off reversal of accruals that lowered staff cost, the fall in NP would have been higher at 36%.


Tougher going ahead 

  • EBITDA margin on service revenue of 29.9% in 1Q17 was above the 2017 guidance of 26-28% but with two big flagship handset launches (Samsung S8 and iPhone 8) this year, management expects handset subsidies to rise further. 
  • In addition, management would not be surprised if TPG were to enter the broadband market first ahead of its mobile debut in 2018, intensifying an already keenly competitive market further.


No commitment on dividends beyond 2017 

  • While management maintained that it assesses the company’s ability to pay dividends on a 3-year basis, it also admitted that the recent auction of 700MHz, 900Mhz and 2.5GHz spectrum cost significantly more than expected and would not commit on dividend sustainability beyond this year. 
  • Of the c.SGD350m cost, SGD68m is payable this year with the rest (SGD282m) due six months before the spectrum becomes available. 
  • Whether it is 2018 or 2019 is still uncertain. Even with our assumption of a 50/50 split between the two years, we believe dividends will need to be cut further to keep gearing below management’s maximum gearing limit of 2x net debt/EBITDA.


Swing Factors


Upside

  • Merger or collaboration with M1 could add heft and resources to compete against Singtel and TPG (TPM AU, NR).
  • Successfully reduces content and other substantial costs to be able to pay for spectrum cost/capex without impacting dividends.

Downside

  • Could lose some mobile market share to a new entrant. M1 (M1 SP, SELL) 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/ 2017-05-04
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 2.360 Same 2.360



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