StarHub - UOB Kay Hian 2015-10-15: Asian Gems Conference 2015 ~ The Hubbing Warrior

StarHub - UOB Kay Hian 2015-10-15: Asian Gems Conference 2015 ~ The Hubbing Warrior STARHUB LTD C33.SI 

StarHub (STH SP) Asian Gems Conference 2015: The Hubbing Warrior 

  • StarHub has proactively filled gaps in its service offerings that could be exploited by a fourth mobile operator, even though it is uncertain at this stage if there will eventually be a fourth mobile operator. The residential broadband business has bottomed and should gradually recover. 
  • Future growth would be driven by expansion in the enterprise market. 
  • Maintain HOLD. Target price: S$3.50. Entry price: S$3.20. 


WHAT’S NEW 

  • We hosted StarHub in our Asian Gems Conference on 12-13 October. Key takeaways from the conference are summarised below. 
  • Addressing potential disruption from a fourth mobile operator. Spectrum auction is schedule to be conducted in early-16. The new entrant needs to offer value by pricing its services at an affordable discount to existing incumbents. StarHub has launched new service offerings to address unfulfilled gaps and niches to address the potential competitive threat. It has launched SIM-only service plans priced at a 20% discount with minimum contract period of three months. Management will also consider launching data-only service plans although it does not intend to offer unlimited data plans. 
  • The fourth mobile operator will be constrained by the lack of ability to bundle multiple services. It could face difficulty sourcing for branded smartphones. It has to contend with many years of start-up losses (incumbents took 4-5 years to turn EBITDA positive). 
  • Recovery in residential broadband anticipated. The price war for fixed broadband services is over. StarHub’s ARPU has stabilised at S$33 in 1H15. Revenue contribution from residential broadband has bottomed and increased 0.8% qoq in 1Q15 and 1.9% qoq in 2Q15. The competition has shifted to offering higher-speed plans. ARPU could gradually recover as customers migrate to such plans. 
  • Undaunted by potential challenge from NetFlix. Video streaming service NetFlix is expected to launch in Singapore on 1 Jan 16. According to management, NetFlix’s content is mainly Western blockbuster movies and TV series, and probably lacks Asian content. StarHub could collaborate with NetFlix, given little overlap in their contents. 
  • NetFlix is popular in the US due to its affordable pricing relative to pay-TV operators (DirecTV’s ARPU: US$105.62, Comcast’s average revenue per customer relationship: US$143). Pricing for pay-TV services is lower in Singapore and the opportunity for NetFlix to undercut the incumbents is limited. 
  • StarHub plans to rationalise its content portfolio. It is able to monitor customers’ viewing pattern though its new set-top boxes that have a return path. Content that is not popular will be weeded out, thus helping StarHub trim its cost of content. 
  • Growth from servicing enterprise customers. StarHub has a high single-digit market share in the enterprise market and there is room for further expansion. StarHub has devoted capex to increase network coverage over the past three years to service enterprise customers, including government agencies and SMEs. It provides good service quality and offers redundancy and a back-up path. StarHub currently partners IT services providers, such as BT Global Services and Logicalis, to provide a total solution. 
  • StarHub’s revenue mix between consumer and enterprise has shifted from 80:20 to 65:35 over the past five years. 

STOCK IMPACT 


 Short-term encumbrance to fade. 

  • We are no longer negative on StarHub, given a recovery in the residential broadband business. Future growth in the enterprise space also brightens the outlook for the stock. Unfortunately, sentiment is temporarily affected by the threat from the potential entry of a fourth mobile operator. 

EARNINGS REVISION/RISK 

  • We maintain our earnings forecasts. 

VALUATION/RECOMMENDATION 

  • Maintain HOLD. We did a scenario analysis based on two possible outcomes: scenario A - no new entrant, and scenario B – a fourth mobile operator disrupts the status quo. We attribute a probability of 75% for scenario A and 25% for scenario B. Our probability-weighted target price is S$3.50. 
  • If there is no fourth operator (scenario A), our target price is S$3.83 (7.9% upside). If a fourth operator enters the mobile market (scenario B), our target price would be S$2.46 (30.7% downside). 

SHARE PRICE CATALYST 

  • Attractive dividend yield of 5.6%. 
  • Recovery in StarHub’s residential broadband services. 
  • Investors flocking back to StarHub in the event that we do not have a fourth mobile operator


Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-15
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 3.50 Same 3.50


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