StarHub - UOB Kay Hian 2015-11-09: 3Q15 ~ Growth From Post-Paid Mobile, Broadband And Fixed Network Services

StarHub - UOB Kay Hian 2015-11-09: 3Q15 ~ Growth From Post-Paid Mobile, Broadband And Fixed Network Services STARHUB LTD CC3.SI 

StarHub (STH SP) 3Q15: Growth From Post-Paid Mobile, Broadband And Fixed Network Services 

  • StarHub’s 3Q15 results were slightly above expectations even if we adjust for a onetime gain of S$15m. 
  • It has maintained growth momentum in post-paid mobile and fixed network services. 
  • The worst is clearly over for residential broadband with revenue contribution increasing on a sequential basis for the third consecutive quarter and ARPU improving S$1 qoq to S$34. 
  • Maintain HOLD. Target price: S$3.82. Entry price: S$3.48. 


RESULTS 


 StarHub reported net profit of S$118.7m for 3Q15, above our forecast of S$96.9m. 

  • StarHub recognised a one-time gain of S$15m for the deconsolidation of SHINE Systems Assets (SSA), which holds MediaHub. 
  • It has reduced its stake in SSA from 100% to 30% due to the strategic partnership with ST Telemedia’s subsidiary STT APDC. Excluding this one-time gain, StarHub’s 3Q15 results would still be slightly above our expectations. 

 Maintains growth momentum in post-paid mobile. 

  • We estimated that revenue from post-paid mobile grew 3.5% yoy but revenue from the pre-paid mobile contracted 17.7% yoy. StarHub added 7,000 post-paid subscribers and post-paid ARPU increased by S$1 qoq to S$71. The pre-paid subscriber base contracted 7.8% yoy due to the new regulation that limits the number of SIM cards registered under each individual from previous 10 to the current three. 

 Worst is over for broadband. 

  • StarHub added 3,000 residential broadband subscribers in 3Q15. ARPU for broadband has also improved by S$1 qoq to S$34 as customers migrated to higher speed plans. This is the third quarter of sequential revenue growth for residential broadband. 

 A saturated market for pay-TV. 

  • StarHub lost 3,000 pay-TV subscribers in 3Q15. ARPU was stable at S$51. Nevertheless, revenue contribution from pay-TV is stable at S$97.2m despite a fairly saturated market. 

 Steady progress for fixed network services. 

  • Data & Internet services grew by 6% yoy due to data centre services and 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. 

 Improving cost efficiency. 

  • Staff costs have declined by 1.7% yoy due to lower temporary staff costs. Expenses for marketing & promotions also declined 17.3% yoy due to more targeted spending on customer acquisition and retention programme aided by data analytics. 


STOCK IMPACT 


 Outlook largely unchanged. 

  • Management has lowered guidance from low single-digit to flat for growth in service revenue in 2015. EBITDA margin is expected to be about 32%. Capex is expected to be about 13% of total revenue. 

 Promoting SIM-only plans. 

  • StarHub has launched a suite of six SIM-only plans with monthly subscription ranging from S$13.95 to S$110. These SIM-only plans offer up to 12GB of bundled mobile data, data upsize options and 4G speeds of up to 300Mbps. 

 Growth from fixed network services. 

  • StarHub provides connectivity (Ethernet, DWDM and leased lines) and solutions (data centres services and unified communications) for enterprise customers. It has invested heavily to build its own dedicated fibre network. It will continue to add capacity and expand coverage so as to gain market share over time. This core network also serves as the backhaul transmission network for its mobile services. 

 Exploring collaboration with NetFlix. 

  • The discussion with NetFlix is in a commercial stage and StarHub is not able to disclose details on the negotiation. 
  • In Japan, NetFlix has entered into a tie-up with SoftBank. SoftBank’s customers can sign up for NetFlix through SoftBank’s retail outlets, website and call centres. NetFlix offers three pricing plans at ¥650/month (S$7.50) for single stream, ¥950/month (S$10.95) for dual stream and ¥1,450/month (S$16.70) for premium UHD family plan. SoftBank will also pre-install the NetFlix app on all its smartphone. Customers can elect to pay their NetFlix subscription fees through SoftBank’s billing system. 
  • Netflix has announced that it will launch its Internet streaming service in Singapore early next year. There is a rumour that NetFlix will charge a subscription fee of S$11/month. 


EARNINGS REVISION/RISK 


 Our net profit forecast for 2015 remains largely unchanged. 

  • We have increased our net profit forecast for 2016 by 6.3% due to: 
    1. improved cost efficiency, and 
    2. the on-going recovery for residential broadband. 


VALUATION/RECOMMENDATION 


 Maintain HOLD. 

  • We have done 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$3.82. 
  • If there is no fourth operator (scenario A), our target price is S$4.17 (previous: S$3.83). If a fourth operator enters the mobile market (scenario B), our target price would be S$2.75 (previous: S$2.46). 


SHARE PRICE CATALYST 

  • Attractive dividend yield of 5.4%. 
  • 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/ 2015-11-09
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 3.82 Up 3.50


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