Starhub - CIMB Research 2016-02-16: 4Q15 hit by higher costs

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STARHUB LTD CC3.SI 

Starhub - 4Q15 hit by higher costs 

• FY15 core net profit was 7% below our forecast on lower revenue and higher costs. 
• Core mobile service revenue was down yoy. Broadband was a bright spot. 
• EBITDA margin fell 5.9% pts yoy (-7.8% pts qoq) to 27.9%. 
• FY16F/17F core net profit cut by 6.4%/8.8% (EBITDA: -9.7%/-8.6%). 
• Maintain Hold. DCF-based target price cut by 5.3% to S$3.60. 

■ 4Q15: Below expectations on higher costs 

• 4Q15’s core net profit fell 14.2% yoy (-24.0% qoq) due to lower service revenue and higher cost of service, while 4Q14 was also boosted by reversal of accruals. The FY15 results were 7% below our expectations, but largely in-line with consensus. As expected, a quarterly DPS of S$0.05 was declared, bringing FY15 DPS to S$0.20 (FY14: S$0.20). 

■ Mobile revenue down on weaker prepaid 

• Revenue for the core mobile business was down 2.3% yoy (+0.8% qoq) due to a decline in prepaid (-15% yoy, -5% qoq), which was impacted by lower IDD/SMS usage. 
• Prepaid ARPU was down 10.5% yoy and also trended lower by 5.6% qoq. 
• In postpaid, revenue growth remained healthy, up by an estimated 6% yoy (+2% qoq) on an enlarged subs base and migration to tiered data pricing plans. 

■ Broadband keeps up positive qoq growth momentum 

• Broadband revenues rose 9.2% yoy, and was up 2.0% qoq, for the fourth consecutive quarter. This was driven mainly by ARPU rising 6% yoy (+3% qoq) as competition is now focused on higher-speed packages. 
• Fixed Network Services revenue fell 2.9% yoy (- 1.3% qoq) due to timing reasons as some project completions slipped into 2016. 

■ EBITDA hit by higher-than-expected costs and provisions 

• EBITDA fell 18.4% yoy (-21.1% qoq) on higher cost of service (subs migration to NBN and some provisions) and traffic expenses, while 4Q14 was also boosted by reversal of accruals. 
• Margins on service revenue fell 5.9% pts yoy (-7.8% pts qoq) to 27.9%. 

■ Revised FY16-17 earnings forecasts 

• We cut our FY16F/17F core net profit by 6.4%/8.8% (EBITDA: -9.7%/-8.6%) to factor in 
  1. lower service revenue growth from mobile and Fixed Network Services, and 
  2. lower EBITDA margin on higher cost of services and traffic expenses. 
• We now expect EBITDA to be flat yoy, while core net profit should decline by 2.3% yoy in FY16. 
• We maintain our DPS forecast at S$0.20 p.a. across FY16-18. 

■ Maintain Hold; lacks short-term catalysts 

• We lower our DCF-based target price by 5.3% to S$3.60 (WACC: 7.1%) and maintain our Hold call. 
• We see a lack of catalysts for StarHub given the slight decline in core net profit in FY16F. 
• We also do not expect it to raise its annual DPS or pay special dividends in FY16-18 as FCF is projected to not exceed S$0.20 given sustained high capex, spectrum fee payments, and more intense competition from the fourth mobile new entrant.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-16

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.60 Same 3.80