Starhub - RHB Invest 2016-02-17: EBITDA Slippage

STARHUB LTD CC3.SI

Starhub - EBITDA Slippage

4Q15 EBITDA margin slumped to a 5-year low on cost spikes and provisions.
Maintain NEUTRAL with a revised SGD4.06 DCF TP (from SGD4.00, 7% upside), as valuations are fair (5.3% yield support).
FY15 results were within estimates and we see little re-rating catalysts, with core earnings likely to come under further pressure from lower fibre grant in 2016 and competitive headwinds post spectrum auction.

StarHub has bounced off its 52-week low (at -1SD of its historical EV/EBITDA mean).

Despite a lower 4Q15 effective tax rate (7%) from the prior year’s tax benefits, core earnings fell 19.7% YoY (-28% QoQ) from sharply lower EBITDA on:
1. higher cost to migrate subscribers to fibre,
2. increased traffic expense, and
3. additional provisions.
The fixed network services (FNS)/pay-tv segment posted positive growth, but not sufficient to offset the erosion in mobile revenue.
Prepaid revenue continued to languish on extended roaming/usage declines. This offset stronger postpaid revenue from increased data usage (avg. 3.1GB/mth) and more subscribers on tiered plans (65% vs. 63% in 3Q15).
Enterprise/FNS remains the key driver. FNS should continue to post steady growth as StarHub makes further inroads into the enterprise space (on its own fibre network) and takes on more public sector jobs (ie Smart Nation projects).

Management has guided for:
1. single-digit service revenue growth for FY16,
2. capex/sales of 13% (excluding SGD80m spectrum payment for 1800MHz), and
3. a 1ppt decline in EBITDA margin to 31%.
Implicit in the guidance is the lower fibre grant (ended-Dec 2015) and stabilisation of the prepaid business.
Echoing its peers, StarHub said there was still no clarity on the spectrum auction.

We lower FY16F-17F core earnings by 11%/7% and introduce FY18 numbers post the results call.
Our DCF TP (WACC: 7.2%, TG: 1.5%) is revised to SGD4.06 after rolling our base year forward.
StarHub trades at 9x FY17F EV/EBITDA, in line with domestic/local peers with a sustainable 5.3% dividend yield, though the stock lacks re-rating catalysts.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-02-17

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 4.06 Up 4.00