StarHub - DBS Research 2016-02-17: Slightly below; maintains dividend guidance

StarHub - DBS Research 2016-02-17: Slightly below; maintains dividend guidance  STARHUB LTD CC3.SI 

Starhub - Slightly below; maintains dividend guidance 

  • Net profit of S$80.8m (-14% y-o-y,-32% q-o-q) was 5% below our expectations due to lower mobile revenue and higher cost of services 
  • Guiding for slightly lower EBITDA margins in FY16 due to drop in adoption grant. 20.0-Sct DPS for FY16, unchanged, implying 5.3% yield 
  • Maintain Fully Valued on StarHub with TP of S$3.30. 
  • Prefer M1 to StarHub; in case of non-entry of 4th telco, we see 27% upside at M1 versus 8% at StarHub 

Lower top line in mobile and higher cost of services hurt bottomline. 

  • Mobile revenue dipped 2% y-o-y due to lower prepaid ARPU and decline in roaming revenue. The gains seen in postpaid, due to ARPU and subscriber growth, were not sufficient to prevent a y-o-y decline. 
  • In addition, the higher costs of services rising 15% y-o-y on normalised basis to S$1,119m was the key culprit. This was driven mainly by the higher NGNBN service costs and increased service costs of the enterprise solutions and projects.

Guidance implies flattish EBITDA in FY16F. 

  • EBITDA margin guidance was 31% for FY16 compared to 32% EBITDA margin in FY15.
  • Given low single-digit top-line growth guidance, EBITDA is likely to remain flat.
  • Management expects pay TV, broadband and enterprise business to show positive growth in FY16F.
  • Mobile could also grow slightly as the number of prepaid subscribers grows while the drop in roaming revenue slows (roaming accounts for ~15% of mobile revenue).
  • Other income from adoption grant is expected to decrease in FY16 due to grant period expiry and is the key reason for lower EBITDA margins in FY16F.

We prefer M1 (HOLD) to StarHub on valuation grounds. 

  • We project flattish profit for StarHub & M1 in FY16F. 
  • Negatives from potential entry of 4th telco have been priced in for M1. 
  • StarHub is currently trading at 17.7x FY16F PE versus 13.8x for M1, implying 28% valuation premium versus M1. 
  • In terms of dividend yield, StarHub’s FY16F dividend yield of 5.3% is lower than M1’s 5.8%. 
  • In case of non-entry of 4th telco, we see 27% upside potential at M1 versus 8% at StarHub.

Sachin Mittal DBS Vickers | 2016-02-17
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