Starhub - CIMB Research 2017-09-22: Cloudy Weather But At Least Now In The Forecast

Starhub - CIMB Research 2017-09-22: Cloudy Weather But At Least Now In The Forecast STARHUB LTD CC3.SI

Starhub - Cloudy Weather But At Least Now In The Forecast

  • StarHub’s mobile business is at risk of being negatively impacted from FY18F onwards by the entry of a fourth mobile operator, TPG.
  • The impact on StarHub is likely to be less severe than on M1 as mobile accounts for only 55% of FY16 service revenue and it is able to bundle quad-play services.
  • Broadband revenue could be flat in FY17F-19F, while Pay TV is facing a structural decline. The only bright spot for growth may be fixed network services.
  • We believe DPS is sustainable at S$0.16 p.a. in FY17-19F, as net debt/EBITDA climbs to a still manageable 1.8x at end-FY20 (i.e. the year EBITDA hits a trough).
  • Upgrade to Hold with unchanged target price of S$2.50.



At risk from fourth mobile operator but likely lower impact than M1 

  • We expect StarHub’s mobile revenue to be largely flat in FY17F, then decline by a total 11% across FY18-20F due to keener competition post TPG’s entry. The impact on StarHub is likely to be less severe than on M1 as the mobile business formed only 55% of StarHub’s FY16 service revenue (estimated 70% of EBITDA). 
  • Its ability to bundle quad-play services also puts it in a stronger position to defend its market share.


Broadband revenue could be flat in FY17F-19F 

  • StarHub’s broadband revenue started to decline qoq in the past three quarters as the positive effects from subs upgrading to higher speed plans diminished while the subs base fell due to intense competition. 
  • We currently expect broadband revenue growth to be flat in FY17-19F, after growing nicely by 8.2% in FY16.


Pay TV business facing structural decline 

  • With the rise of alternative over-the-top video platforms and increased proliferation of pirated set-top boxes, StarHub’s Pay TV revenue (17% of FY16 service revenue) could decline by 5.4% CAGR in FY17-19F, based on our forecasts.


Fixed network services growth could provide some buffer 

  • StarHub’s fixed network services business (18% of FY16 service revenue) is the only bright spot for growth, in our view. We forecast revenue to grow steadily at a 3.2% CAGR in FY17-19F, driven by healthy demand for managed services.


Scenario analysis on FY18-20F earnings 

  • We have factored in a -10% impact on StarHub’s mobile ARPU in FY18-20F, which results in EBITDA/core EPS declining by a total 8.9%/20.6% over the 3-year period. 
  • Our scenario analysis suggests that EBITDA/core EPS for StarHub will fall by a bigger 16.0%/33.8% in FY18-20F if mobile ARPU is hit by -15% (bear case), or by a lower 1.8%/7.5% if the impact on mobile ARPU is only -5% (bull case).


Flat S$0.16 DPS in FY17-19F 

  • We expect FY17F DPS to be S$0.16 (FY16: S$0.20), in line with StarHub’s guidance, and sustained at the same levels in FY18F-19F. 
  • Even though we see FCF/share dipping to S$0.03 in FY18F (including 700MHz spectrum payments), we project a rebound to S$0.20 in FY19F. 
  • Net debt/EBITDA could climb to a still manageable 1.8x at end-FY20F (i.e. the year EBITDA hits a trough).


Upgrade to Hold with unchanged target price of S$2.50 

  • We upgrade StarHub from Reduce to Hold with an unchanged DCF-based target price of S$2.50 (WACC: 7.1%), as we believe its share price now reflects the risks of more competition from TPG. Its 13.8x FY18F EV/OpFCF is at a 19% discount to the ASEAN telco average, which we think is fair given the prospect of declining earnings. 
  • A good entry point would be below S$2.20 (bear case) and exit point above S$2.80 (bull case).




FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2017-09-22
CIMB Research SGX Stock Analyst Report HOLD Upgrade REDUCE 2.500 Same 2.500



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