StarHub - Maybank Kim Eng 2016-02-17: Challenging Times Ahead

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STARHUB LTD CC3.SI 

StarHub (STH SP) Challenging Times Ahead 

Downgrade to HOLD 

• FY15 is in line but it will be increasingly difficult for StarHub to maintain profit growth given the challenging times. 
• It expects a low single-digit rise in service revenue but cut EBITDA margin guidance to 31%. 
• With interest cost set to rise as it gears up to pay for spectrum, we expect profits to fall. FY16-17 forecasts cut 3-6%. 
• On the bright side, it expects to maintain annual DPS at 20 cts, yielding c.5%. 
• Downgrade to HOLD. 
• DCF TP lowered to SGD4.00 on lowered forecasts and higher return threshold. 

FY15 within reduced expectations 

• StarHub reported in-line FY15 results following downward revisions in 3Q. 
• Net profit was flat at just 0.5% growth on a 2% decline in mobile revenue and a 3% fall in fixed network services. 
• Mobile fell on lower prepaid and roaming revenue, while fixed network slipped on timing differences in project recognition. However, Pay TV and broadband revenue were resilient in the face of increasing OTT content and competition. 

But outlook is poor 

• However, StarHub is projecting just low single-digit growth in service revenue and cut EBITDA margin guidance to 31% from the 32% recorded in FY15, the lowest since 2011. 
• Even low single-digit revenue growth may be ambitious in the face of declining mobile revenue, which accounts for 50% of total revenue. 
• In addition, gearing is set to rise as capex will remain high at 13% of sales, not including payments for spectrum. 

More negative catalysts than positive ahead 

• While StarHub plans to maintain DPS at 20 SGD cts, this does not take into account more spectrum costs from this year’s auction. 
• For FY16, we have factored in SGD80m to pay for 1800MHz spectrum acquired in 2013, and net debt/EBITDA is already expected to rise to 0.9x from 0.7x in FY15. 
• StarHub intends to increase its revenue streams and cut costs but it may not be able to do enough to stem a decline in profitability.

Swing Factors 

Upside 

• No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco. 
• Merger with M1 could add heft and resources to compete against Singtel and fourth mobile operator. 

Downside 

• Could lose some marginal mobile market share to a new entrant. M1 is expected to lose the most.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-02-17

Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 4.00 Down 4.51