Starhub - CIMB Research 2015-12-09: Not a starry-starry night

STARHUB LTD CC3.SI

Starhub - Not a starry-starry night

StarHub’s mobile business is at risk of being impacted from FY17 onwards by the potential entry of a fourth mobile operator.
Impact should be lesser vs. M1, as the mobile business accounts for a smaller 56% of StarHub’s total service revenue and given its ability to bundle quad-play services.
Annual DPS should stay at S$0.20 in FY15-17. Special dividends are unlikely.
Maintain Hold with unchanged DCF-based target price of S$3.80. Scenario analysis suggest a target price of S$3.00 in bear case and S$4.25 in bull case.

While we expect fixed broadband revenue to bottom out in FY15, StarHub’s mobile business is at risk of being impacted from FY17 by the potential entry of a fourth mobile operator. Nevertheless, the impact to StarHub should be lesser than M1, as its mobile business accounts for only 56% of its service revenue and its ability to bundle quad-play services may put it in a stronger position to defend its mobile market share.

We have factored in a negative 15% impact to StarHub’s mobile ARPU between mid- 2017 and 2020.
The impact could be worse if the new entrant employs more aggressive pricing strategies, or lesser if the new entrant’s execution is poor (network, branding).
Our sensitivity analysis suggests that our target price for StarHub would fall to S$3.00 if its mobile ARPU is negatively impacted by 30% (bear-case) by FY20.
If the negative impact on its mobile ARPU is only 5% (bull-case), our target price would be at S$4.25.

On the positive side, StarHub’s broadband business has started to stabilise. Revenue rose 4.3% qoq (+3.9% yoy) in 3Q15, the third consecutive quarter of qoq improvement.
Given the significant price adjustments made last year and current competition centred around higher-speed packages (e.g. 1Gbps for S$49/month), we believe that ARPU has bottomed out at the current levels of S$33-34.
We forecast broadband revenue to fall 3.8% yoy in FY15, and then recover 3.1%/1.5% yoy in FY16/17.

Overall, we forecast EBITDA to rise 3.8% in FY15 on higher service revenue, then hit slower growth rates of 1.9%/2.1% in FY16/17 as NBN grants come to an end.
In terms of dividends, we do not expect StarHub to raise its annual S$0.20 DPS as FCF/share will stay at S$0.21-0.23 in FY15-17 due to high capex and spectrum payments (1800MHz, 900MHz).
Given the business headwinds, we believe StarHub will not pay any special dividends during FY15-17 to maintain some flexibility in its balance sheet.

Maintain Hold with an unchanged DCF-based target price (WACC: 7.1%).
StarHub trades at FY16 EV/OpFCF of 12.5x, 9% discount to ASEAN telcos’ average, while its FY16 EV/EBITDA of 8.3x is in line.
Its dividend yield of 5.6% p.a. is decent.
Key upside risk is the non-entry of a fourth mobile player into Singapore.
Key downside risk is higher-than-expected negative impact on StarHub’s mobile ARPU from new competition.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.80 Same 3.80