UOB Kay Hian 2015-08-06: Starhub - 2Q15 : Less Aggressive On Customer Acquisitions. Maintain SELL.

STARHUB LTD CC3.SI

2Q15: Less Aggressive On Customer Acquisitions

StarHub’s 2Q15 results were above expectations due to lower handset subsidies.
Slowdown in mobile revenue and lacklustre contribution from Pay TV are negative trends, although residential broadband has stabilised on a sequential basis.
StarHub’s outlook is uncertain due to the potential entry of a fourth mobile operator.
Maintain SELL. Target price: S$3.57.

StarHub reported net profit of S$99.1m for 2Q15, above our forecast of S$93.1m.
Slowdown in mobile revenue. Mobile revenue grew by only a marginal 0.2% yoy. Revenue from post-paid mobile grew 3.6% yoy but revenue from pre-paid mobile contracted 16.4% yoy. Growth in net addition of post-paid subscribers has slowed to 12,000. The pre-paid subscriber base has stabilised after suffering five consecutive quarters of contraction due to the limit of three SIM card registrations for each individual.
Handset subsidy was reduced from S$79.5m in 1Q15 to S$55.5m in 2Q15. We believe StarHub has toned down from aggressive customer acquisitions, which explains the softer net addition for post-paid mobile.
Stabilisation of broadband. ARPU for residential broadband has stabilised at S$33. StarHub saw a slower pace of growth in residential broadband subscribers in 2Q15, adding 2,000 subscribers for the quarter.
A saturated market for pay TV. StarHub’s subscriber base for pay TV was stagnant at 545,000. ARPU edged up slightly to S$52.
Progressively expanding fixed network services. Data & Internet services grew by a moderate 7.2% yoy due to data centre services and connectivity services, such as leased lines. StarHub was able to grow this business by positioning itself as an alternative service provider that could add redundancy to customers’ existing network.

Maintaining guidance. Management guided for low single-digit revenue growth in 2015. EBITDA margin is expected to be about 32%. Management has maintained its guidance for 2015 despite poor financial performance in 1Q15.
JV to develop MediaHub. StarHub has entered into a strategic JV with ST Telemedia’s wholly-owned subsidiary STT GDC to establish Shine Systems Assets. STT GDC will invest S$36.9m for a 70% stake in Shine Systems Assets while StarHub will own the remaining 30% stake. Shine Systems Assets holds MediaHub, a highly specialised telecommunications, media and data centre facility with a media head-end, central office and innovations centre. MediaHub will have a highly secure Tier 3 data centre facility. StarHub will sub-lease more than 65% of the total gross floor area. The partnership with ST Telemedia will reduce capex as StarHub will own only 30% of MediaHub.
No change to dividend policy. Management intends to maintain its dividend at 5 S cents per quarter and 20 S cents per year for 2015.

We have raised our net profit forecast for 2015 by 3.8% and for 2016 by 3.9% due to the better 2Q15 results and lower traffic expenses.

We have raised our target price for StarHub to S$3.57 based on DCF (required rate of return: 7.2%, terminal growth: 1%).

Slower growth from mobile business.
Capital management exercise would be unlikely given competition for mobile and residential broadband services.

Jonathan Koh CFA | http://research.uobkayhian.com/ UOB Kay Hian 2015-08-06

SELL Maintain SELL 3.57 Up 3.50