StarHub - The Litmus Test On Hubbing
- 1Q17 results were broadly in line with the cessation of the fibre adoption grant crimping EBITDA alongside the typical seasonality exhibited.
- We expect lacklustre earnings going into 2H17, with handset subsidies likely to remain elevated. StarHub’s hubbing strategy would be put to the real test with TPG poised to offer a bundled service come 2018.
- Maintain NEUTRAL, as valuations are near -1SD of its historical EV/EBITDA mean and supported by a decent 5.8% dividend yield.
- The DCF-based SGD2.70 TP is unchanged (WACC: 7.2%, 3% downside).
Broadly in line.
- StarHub’s 1Q17 core earnings rose 27.5% QoQ on seasonally- higher EBITDA (lower handset sales), but were lower YoY. This was due to structural revenue pressure and the expiration of next-generation broadband (NGN) adoption grants.
- We deem the results to be broadly in line, at 24% and 25% of our and consensus full-year estimates respectively.
- A 4 cents/share quarterly DPS was declared, consistent with earlier guidance of a lower payout in FY17. This is due to spectrum commitments and concerns over the competitive landscape with the entry of TPG Telecom (TPG).
Persistent pressure points.
- All lines of business posted YoY revenue weakness, with the exception of broadband and enterprise fixed. This is still not able to offset the structural weakness (lower usage and roaming) in mobile service revenue (-0.6% YoY), which resulted in overall service revenue slipping by 1% YoY.
- Pay-TV revenue contraction increased to 6.8% YoY in 1Q17 (4Q16: -6.1% YoY), as StarHub continued to grapple with piracy and “cord-cutting” as subscribers (subs) turn to alternative viewing platforms.
- Broadband revenue growth appears to be tapering off (1Q17: +0.4% YoY, 4Q16: +4%) due to competition, albeit buffered by the stronger migration to fibre broadband.
- We note the recent introduction of a “data jump” promotion for SGD10/month (step-up data allowance feature) as an attempt to better monetise data usage following the upsized promotions launched last year. Average data usage has widened to 3.9GB/subs/month in 1Q17 (1Q16: 3.1GB/sub/month, 4Q16: 3.7GB/subs/month).
MoU with M1.
- Disappointingly, there were no updates on the network collaboration with M1 (M1 SP, NEUTRAL, TP: SGD2.05), which could have been put on hold pending the strategic review undertaken by the latter’s major shareholders.
Forecasts and risks.
- There is no change to our core earnings forecasts, which have modelled in a 2-year EPS CAGR of -4.5%. This is due to the entry of a fourth operator (TPG), elevated handset subsidies and continued pressure on broadband/pay-TV revenues.
- Key downside risks are stronger-than-expected competition, higher-than-expected capex and dividend disappointments.
- StarHub has been the worst-performing telco YTD, underperforming the STI by 12.9%.
- It trades at 8.7x FY18 EV/EBITDA, which is near -1SD to its historical average, and is supported by a 5.8% dividend yield