StarHub - DBS Research 2017-10-16: Trading At A Premium

StarHub - DBS Vickers 2017-10-16: Trading At A Premium STARHUB LTD CC3.SI

StarHub - Trading At A Premium

  • Market is not paying enough attention to Circles.Life.
  • StarHub might need to cut annual DPS to 14 Scts in FY19F to stay below 2.0x net debt to EBITDA.
  • Maintain FULLY VALUED with a lower Target Price of S$ 2.20.



The counter is expensive despite a decent dividend yield. 

  • The number of households subscribing to all three services – pay TV, fixed broadband and mobile – has been declining which has been a critical factor in dictating the stock’s performance. 
  • On valuation, StarHub is expensive at a forward PE of 17.5x (versus sector average of 15x) and 9x EV/EBITDA (versus sector average of 7.5x) as investors tend to value the company in terms of dividend yield. 
  • While StarHub will maintain an annual DPS of 16 Scts in 2017 (6% yield), StarHub’s annual DPS could be cut to 14 Scts in FY19F to stay below 2.0x net debt to EBITDA.


Where we differ: 

  • Market is not paying enough attention to Circles.Life and the big divergence between EBITDA and earnings. Circles.Life in its short history of less than 12-months of operations seems to be doing well, supported by its service delivery model and cheaper data pricing. 
  • Moreover, even under the bull-case scenario of StarHub sustaining EBITDA in FY18F/19F, its earnings are set to decline sharply due to sharp rise in amortisation costs as StarHub is set to pay S$350m in total for spectrum acquired in 2017’s general spectrum auction.


Potential Catalyst – 

  • Decline in hubbing households in 2H17F and possible changes to StarHub’s mobile plans. 
  • Continued downgrade of all-three services by higher-end hubbing households and possible dilution of ARPUs, due to M1’s mySIM plans, could lead to investors readjusting their expectations.


Valuation

  • Maintain FULLY VALUED with lower Target Price of S$2.20. 
  • We raise WACC to 6.0% from 5.7% previously as we expect higher volatility in the stock to raise the cost of equity. We roll forward our DCF valuation base to FY18F, and assume 0% terminal growth.


Key Risks to Our View

  • Limited uptake of TPG and Circles.Life. Under our bull case scenario for StarHub, we project Circles.Life and TPG to secure mobile revenue share of only 3.5% in 2022 versus our base case projection of 5.5%, leading to a TP of S$2.57 for StarHub.



CRITICAL DATA POINTS TO WATCH 


Hubbing strategy under pressure. 

  • StarHub's go-to market strategy of bundling mobile, broadband and pay-TV services has come under pressure from the proliferation of OTT TV services. 
  • Nearly 14,000 customers with subscriptions to three or more services have downgraded since 2Q16, representing ~4% of subscriptions with three or more services. Majority of these customers are moving away from Pay-TV to cheaper alternatives such as Netflix, despite losing the discount available on bundled services in the process. 
  • We believe downgrades of hubbing subscriptions would accelerate amid the increasing appeal of OTT TV services among high-end Pay TV customers and rising pressure on the broadband segment from M1 and MyRepublic.

Pressure from M1 could lead to possible decline in ARPUs. 

  • StarHub managed to reverse declines in ARPU, witnessed over the past three quarters, in 2Q17. Postpaid ARPUs improved 4% q-o-q in 2Q17 despite declining 1% on a y-o-y basis. We believe that recent unlimited data plans introduced by Starhub at higher rentals would further buttress ARPU growth over the near term. 
  • However, Starhub’s efforts to lift ARPUs may be undercut by M1’s recently introduced mySIM plans, which offer similar data quotas and lower legacy bundles at over 50% discount to similar SIM-only plans by StarHub. If StarHub decides to match M1’s latest mySIM plans in a bid to prevent M1 poaching StarHub's subscribers, StarHub could witness potential dilution of ARPUs in the near term.




Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-10-16
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 2.20 Down 2.330



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