StarHub (STH SP) - UOB Kay Hian 2017-05-04: 1Q17 Sequential Rebound But Confronting Multiple Challenges

StarHub (STH SP) - UOB Kay Hian 2017-05-04: 1Q17: Sequential Rebound But Confronting Multiple Challenges STARHUB LTD CC3.SI

StarHub (STH SP) - 1Q17: Sequential Rebound But Confronting Multiple Challenges

  • The contraction in mobile revenue has moderated to 0.6% yoy. However, the decline in pay TV has steepened and the recovery in residential broadband has stalled. 
  • We estimate net debt/EBITDA to deteriorate from the current 0.9x to 1.9x by 2019 due to payments for newly-acquired spectrum. 
  • Negotiation with M1 on network sharing is ongoing. 
  • Maintain HOLD on StarHub. Target price: S$2.98. Entry price: S$2.62.



RESULTS

  • StarHub reported net profit of S$73.1m for 1Q17 (-21.2% yoy), slightly below our expectation of S$76.6m.

Mobile: Revenue still contracting. 

  • StarHub gained only 5,000 post-paid subscribers and lost 22,000 pre-paid subscribers (expiry of tourist SIM cards). 
  • Post-paid ARPU dropped 2.9% yoy to S$67 due to lower contribution from outbound roaming, while prepaid ARPU was stable at S$15. We estimate post-paid revenue increased 0.4% yoy but pre-paid revenue dropped 7.2% yoy. 
  • Handset subsidies increased by an estimated 19.8% yoy to S$66.6m as StarHub seeks to lock in customers with 2-year contracts.

Pay TV: Competition from alternative viewing options. 

  • StarHub lost another 11,000 pay TV subscribers, the seventh consecutive quarter of decline. Its pay TV subscriber base contracted 7.8% yoy. Pay TV ARPU was stable at S$51. 
  • Pay TV continues to face competition from pirated content and alternative viewing options, such as online media.

Residential broadband: Flat revenue. 

  • StarHub lost 3,000 broadband subscribers but ARPU was stable at S$37. Customers continued to migrate to fibre broadband, which accounted for 78.7% of its broadband subscriber base.

Enterprise fixed: Starting to gain traction. 

  • Revenue from data & Internet increased 6.6% yoy. Management plans to expand managed services that bundles connectivity with analytics and security solutions. It also intends to secure more enterprise customers and reduce the reliance on its wholesale business.

One-off decrease in staff cost. 

  • Staff costs declined 8.1% yoy due to reversal of accruals for share-based payment expenses no longer required. Other income, primarily adoption grants for NGNBN, dropped from S$12.6m in 1Q16 to S$0.3m in 1Q17.
  • StarHub declared a dividend of 4 cents/share for 1Q17.


STOCK IMPACT


Guided dismal outlook for 2017. 

  • Management guided that service revenue for 2017 would be similar to 2016’s. 
  • EBITDA margin is expected to contract to 26-28% (2016: 31.2%) due to higher costs for customer acquisitions (handset subsidies), less adoption grants from NGNBN and negative impact of stronger US$ on payments for smartphones and content. 
  • Capex is expected to be 13% of total revenue (exclude spectrum payments).

New dividend policy addresses threat from fourth telco. 

  • StarHub has realistically reduced its dividends from 5 cents to 4 cents per quarter for 2017
  • Management expects the new level of dividends to be sustainable, based on outlook for cash flows over the next three years.

Working towards a formal agreement on network sharing. 

  • Network sharing enables StarHub to ensure it provides best-in-class mobile coverage and simultaneously minimise capex and opex. Going forward, StarHub will compete and differentiate itself based on service quality.
  • The MOU with M1 allows the two companies to commence discussion and engage regulators. Management will focus on finalising the framework for network sharing, leading to the signing of a formal agreement.

Network disruption caused by a surge in traffic. 

  • Info-communications Media Development Authority (IMDA) and Cyber Security Agency (CSA) conducted an exhaustive investigation and concluded that the disruption to StarHub’s home broadband services last October was caused by a legitimate surge in traffic that StarHub’s domain name server could not handle. The initial symptoms were similar to a massive distributed denial of service (DDoS) attack but IMDA and CSA did not uncover any evidence that it was a DDoS attack.
  • StarHub has increased its domain name processing capacity and took additional security measures to prevent a recurrence of similar incident. It would continuously review the security and resiliency of its network infrastructure.

Management revamp. 

  • StarHub has appointed Chong Yoke Sin, previously CEO of Integrated Health Information Systems, as Chief of Fixed Enterprise with effect from 3 Apr 17. Mock Pak Lum, currently the CTO, was designated as Chief Business Development Officer. Chong Siew Loong, currently vice president of network engineering and CTO, will become head of network engineering. 
  • The revamp could sharpen StarHub’s focus on the fixed enterprise business.


EARNINGS REVISION/RISK

  • We maintain our earnings forecasts.


VALUATION/RECOMMENDATION

  • Maintain HOLD. We maintain our target price at S$2.98, based on DCF (COE: 6.75% and terminal growth: 1.5%).


SHARE PRICE CATALYST

  • Dividend yield has improved to 5.8% after the recent steep share price correction.
  • Savings in capex from the sharing of mobile infrastructure with M1.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-04
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.98 Down 3.100



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