DBS Vickers 2015-08-06: Starhub - 2Q15 Results. Slight miss due to handset subsidies. Maintain FULLY VALUED.

Slight miss due to handset subsidies 


  • 2Q15 net profit of S$99m (+5% y-o-y, +34% q-o-q) was slightly below consensus expectations of S$103m as 1H15 profit of S$172.8m declined 6%. 
  • Handset subsidy costs were higher than expectations due to iPhone 6's popularity. 
  • Maintain Fully Valued with unchanged TP of S$3.70. 


Highlights 


Higher handset subsidies the key reason. 

  • Sale of equipment stood at S$35.2m versus S$24.7m in 2Q14, however cost of equipment stood at S$90.7m versus S$70.8m in 2Q15, indicating almost S$10m more in handset subsidies. 

Mobile revenues were flat on an annual basis. 

  • Overall mobile revenue stood at S$310.8m (+0.2% y-o-y, +1.8% q-o-q). Postpaid revenues improved sequentially from improvement in postpaid ARPU to S$70 from S$68 possibly as StarHub sold many iPhones in 1Q15. 
  • About 63% of subscribers were on tiered plans and 22% of them exceeded the data-caps. 
  • On a positive note, broadband business has stabilised. Broadband revenue rose 1.8% q-o-q to S$49m, the second quarter of sequential improvement. 

Broadband ARPU was stable sequentially at S$33. 

  • Outlook Cable TV is stable now but challenges in the long term cannot be ruled out. 
  • We expect over-the-top (OTT) content providers such as Netflix to target Singapore market sooner or later. 
  • StarHub believes that it can collaborate with such OTT players to provide them the reach via its set-top boxes while subscribers do not have to remember separate user IDs and passwords. 
  • Overall, we think that cable TV revenue could face pressure in the long term as channels also go the OTT route and consumers can pay for just selected channels instead of the whole bundle. 

We expect StarHub to react to aggressive mobile offers by M1. 

  • In last week of July, M1 launched a new SIM-only plan at S$30 a month for a 5GB data bundle, 300 minutes of talktime and 1,000 SMS and MMS. Consumers need to sign a one-year contract. 
  • StarHub currently offers a similar 5GB plan at S$66.32 which could be possibly be reduced, in our view. 

Potential 4th player could pose a threat in mobile business. 

  • 4G spectrum auction, expected in 1Q16, could result in a 4th mobile player entering the market in 1H17. 
  • This is likely to challenge pricing levels and erode market share for existing players. 
  • We estimate that StarHub could lose 4% of its revenue (versus 10% revenue share loss for M1) to the new player by 2022. 


Valuation: 


  • We use discounted cash flow valuation (WACC 6.5%, terminal growth 0%) to derive a target price of S$3.70. 


Key Risks: 


  • Decline in mobile roaming. A potential decline in mobile roaming and broadband margins are the key downside risks to our estimates.



Analyst: Sachin MITTAL

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


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