StarHub Ltd - OCBC Investment 2018-02-15: More Gloom Than Bloom

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STARHUB LTD CC3.SI

StarHub Ltd - More Gloom Than Bloom

• FY17 NPAT missed but EBITDA in-line.
• Enterprise fixed a bright spot but not enough.
• Weak FY18 outlook.

FY17 NPAT suffered on higher expenses 

• StarHub Ltd’s (StarHub) 4Q17 revenue rose 2.2% YoY to S$649.0m, driven by Enterprise Fixed (+21%) and sales of equipment (+14%), but operating expenses grew at a faster pace of 9.3% to S$624.0m on higher cost for premium handsets, higher managed services and fibre broadband cost. Consequently, 4Q17 EBITDA and PATMI plunged 28.6% and 74.0% y-o-y to S$96.8m and S$14.1m, respectively. 
• For FY17, revenue was flat at S$2400.7m, as growth from Enterprise Fixed (+9%) and sales of equipment (+9%) were dragged by broadband (-1%) and Pay TV (-8%) and mobile (-2%). In addition, FY17 operating expenses grew 3.4% to S$2071.6m mainly on similar reasons as 4Q17. Consequently, on lower service revenue and income grant, FY17 PATMI declined 27.1% to S$249.0m, and formed 86% of our NPAT estimate. FY17 EBITDA met our expectations as it fell 11.0% to S$613.9m and formed ~101% of our estimate. EBITDA margin also fell 3.3ppt to 27.9%.

EBITDA margin and service revenue to decline further in FY18 

• For FY18, Starhub guided for:
  1. FY18 service revenue to fall y-o-y by 1% to 3%,
  2. EBITDA margin on service revenue to be between 24-26% (FY17: 28%) before SFRS(I) 15 adoption,
  3. cash capex to be ~11% of total revenue (excludes spectrum payments), and
  4. a quarterly cash dividend of 4.0 S-cents per ordinary share. 
• In our view, these guidance are reflective of the challenges Starhub’s traditional businesses are facing in an intensifying competitive landscape.

Telecom sector sees no respite 

• While Enterprise Fixed is gaining good traction with double digit revenue growth in 4Q17 as it ramps up on its ICT-related business with a suite of solutions offered, we do not expect it to more than offset the tremendous pressures on other traditional businesses ahead given the increased competition in the telecom industry. 
• Furthermore, we expect balance sheet to be materially weaker post-payment of its spectrum commitment of S$282m though there is no definite timeline for now. 
• All considered, we adjust downwards our estimates, roll-forward our valuations, and reduce our Fair Value from S$2.30 to S$2.20.
• (Maintain SELL)

Eugene Chua OCBC Investment | http://www.iocbc.com/ 2018-02-15

OCBC Investment SGX Stock Analyst Report SELL Maintain SELL 2.20 Down 2.300