CIMB Research 2015-07-09: Starhub - Not a starry-starry night. Maintain HOLD, TP Cut.

Not a starry-starry night 

  • While we expect fixed broadband revenue to finally bottom out in FY15, StarHub’s mobile business is now at risk of being impacted from FY17 onwards by the entry of a fourth MNO. 
  • With high capex and spectrum payments, we also see little upside to its current DPS. 
  • We keep our core EPS for FY15-16 unchanged but cut FY17 EPS by 2.6% to factor in the initial impact from the fourth MNO launching its services in mid-2017. 
  • Between FY17 and FY20, we have assumed that StarHub’s mobile ARPU would be negatively impacted by 15%. As such, our DCF-based target price (WACC: 7.1%) is cut by 12.6% to $3.80. 
  • We maintain our Hold rating

Sensitivity analysis on target price 

  • StarHub’s mobile ARPU could decline by a bigger magnitude if the new entrant employs more aggressive pricing strategies than expected. 
  • On the other hand, if the new entrant is not able to execute well in terms of mobile network rollout and building a strong brand, its impact on StarHub’s mobile ARPUs could be limited. 
  • Our sensitivity analysis suggests that our target price for StarHub would fall to S$3.00 if its mobile ARPU is negatively impacted by 30% (bear-case) by FY20. 
  • If the negative impact on its mobile ARPU is only 5% (bull-case), our target price would be at S$4.25. 

Broadband flattening out 

  • On the positive side, StarHub’s broadband business has started to stabilise. 
  • Revenues inched up 0.8% qoq (-10.8% yoy) in 1Q15, putting a stop to six consecutive quarters of decline. 
  • Given the significant price adjustments made last year and current competition centred around higher-speed packages (e.g. 1Gbps for S$49/month), we believe that ARPU has bottomed out at the current levels of S$33. 
  • We forecast broadband revenue to fall 3.8% yoy in FY15, and then recover 3.1%/1.5% yoy in FY16/17. 

Dividends to stay the same 

  • Overall, we forecast EBITDA to rise 3.8% in FY15 on higher service revenue, then hit slower growth rates of 1.9%/2.1% in FY16/17 as NBN grants come to an end. 
  • In terms of dividends, we do not expect StarHub to raise its annual S$0.20 DPS as FCF/share will stay at S$0.21-0.23 in FY15-17 due to high capex and spectrum payments (1800MHz, 900MHz). 
  • Given the business headwinds, we also believe StarHub will want to maintain some flexibility in its balance sheet and not pay any special dividends over the next three years. 

(FOONG Choong Chen, CFA)