DBS Group Research 2015-07-27: Starhub - Mobile to face pressure. Downgrade to FULLY VALUED.

Mobile to face pressure 

  • Postpaid ARPU may decline going forward due to declining legacy revenue amid flattish data usage. 
  • iPhone 6’s popularity is a burden on telcos – at least in FY15F. 
  • Downgrade to Fully Valued with revised DCF-based TP of S$3.70. 

Postpaid ARPU may decline due to flat data usage and decline in legacy revenue. 

  • Voice and SMS accounted for over 50% of mobile revenue in 1H15. 
  • We estimate that international and roaming revenues contribute 12% of mobile revenue which, will continue to decline sharply as consumers use Whatsapp, Facetime and LINE calls over Wi-Fi when overseas. 
  • Meanwhile, data usage may be flattish, as seen in markets such as Korea when 4G penetration reaches 65-70%. 
  • In our view, there is a need for telcos to launch bigger or unlimited data capacity plans at 10-20% premium to the most popular plans to defend ARPU by incurring high capex. 
  • However, we do not sense any urgency from telcos as yet. 

iPhone 6’s popularity is a burden on telcos – at least in FY15F. 

  • Apple reviews the postpaid plans and handset subsidies offered by telcos and expects telcos to bear the marketing expenses for iPhones. 
  • Samsung, on the other hand, allows telcos to decide the subsidy levels and incurs the marketing expenses for Samsung phones. 

Downgrade to Fully Valued. 

  • We cut our FY15F/16F earnings for Starhub by 5%/9% as we assume that postpaid ARPU will decline 1% each year versus +1% growth assumption earlier. 
  • In addition, we anticipate an increase in cost of sales as data allowances are increased by telcos. 
  • We use discounted cash flow valuation (WACC 6.5%, terminal growth 0%) to derive a target price of S$3.70. 
  • StarHub could lose up to 4% of its group revenue by 2022 due to the 4th telco's entry, based on our estimates. 

(Sachin MITTAL)

Source: http://www.dbsvickers.com/