StarHub - UOB Kay Hian 2016-02-17: 4Q15 Revenue Headwinds, Expenses Balloon

StarHub - UOB Kay Hian 2016-02-17: 4Q15 Revenue Headwinds, Expenses Balloon STARHUB LTD CC3.SI 

StarHub (STH SP) 4Q15: Revenue Headwinds, Expenses Balloon 

  • Results disappointed with mobile revenue contracting 2.3% yoy due to erosion of ARPU for pre-paid services. 
  • Pay-TV business suffered a second consecutive quarter of decline in subscriber base while higher cost of services ate into EBITDA margin. 
  • We expect earnings to decline 6.2% in 2016 due to less adoption grants for NGNBN. 
  • Maintain HOLD. Target price: S$3.80. Entry price: S$3.30. 


RESULTS

  •  StarHub reported net profit of S$80.8m for 4Q15, below our forecast of S$95m. 

• Erosion of mobile revenue. 

  • Mobile revenue contracted 2.3% yoy in 4Q15. We estimate post-paid revenue expanded just 0.8% yoy but pre-paid revenue could have declined by a massive 18.7% yoy. StarHub gained 5,000 post-paid subscribers and post-paid ARPU increased S$1 qoq to S$72. Pre-paid ARPU decreased S$1 qoq to S$17 due to the decline in usage for iDD and SMS. 

• Losing pay-TV subscribers. 

  • StarHub lost 6,000 pay-TV subscribers in 4Q15, the second consecutive quarter of attrition in its pay-TV subscriber base. StarHub has stopped offering TV Lite which gives home broadband customers access to 16 free view channels at S$16.05/month. Fortunately, ARPU was stable at S$51. 

• Recovery in residential broadband continued. 

  • StarHub lost 1,000 residential broadband subscribers but ARPU continued to climb by S$1 qoq to S$35. It has 270,000 fibre broadband subscribers, which account for 57% of its residential broadband subscriber base (4Q14: 38%). This is the fourth consecutive quarter of sequential growth in revenue from residential broadband. 

• Fixed network services rather stagnant. 

  • Revenue from data & internet declined 1.9% yoy. StarHub did not managed to complete some projects within 4Q15 and so revenue recognition is expected to spill over into 1H16. 

• Higher expenses. 

  • Cost of services increased 33.2% yoy due to rapid migration to fibre broadband, adjustments to previous quarter’s costs and costs for enterprise projects. Traffic expenses increased 37.3% yoy due to higher international traffic volume and adjustments to prior quarter’s accruals. 
  • EBITDA margin narrowed to 27.9% from 33.8% last year. 


STOCK IMPACT 


• Muted outlook for 2016. 

  • Management guided low single-digit growth in service revenue in 2016. EBITDA margin is expected to come in at 31% (2015: 32.2%) after factoring in less adoption grants for NGNBN. Capex is expected to make up 13% of total revenue (excluding spectrum payment of S$80m). 
  • StarHub intends to maintain cash dividend at 20 S cents/share. 

• Growth from fixed network services. 

  • StarHub provides connectivity (Ethernet, DWDM and leased lines) and managed services (data centre services and unified communications) for enterprise customers. It has invested heavily to build its own dedicated fibre network. It will continue to add capacity and expand coverage so as to gain market share over time. This core network also serves as the backhaul transmission network for its mobile services. 
  • StarHub has made inroad to government agencies. It has started to offer value-added services, such as security and analytics.

• Collaboration with Netflix. 

  • StarHub entered into a partnership with Netflix to offer its fibre-TV customers access to Netflix through their set-top boxes starting 2Q16. The viewing experience would be seamless with Netflix integrated into StarHub TV set-top boxes. 
  • Subscription to Netflix is offered to StarHub’s mobile and broadband customers at Netflix’s prevailing pricing plans. Customers also have the option to charge their Netflix subscription to their StarHub bills. 

• Enhanced sports content with La Liga. 

  • StarHub has secured the broadcast rights to the Spanish La Liga. Matches will be shown in high definition on SuperSports 2 (under the sports group) and StarHub’s free cable channel SuperSports Arena starting Jan 16. 
  • StarHub TV customers could catch the galacticos from Barcelona and Real Madrid in action. They could also follow the progress of Valencia, which is owned by Singaporean businessman Peter Lim. 


EARNINGS REVISION/RISK 

  • We cut our net profit forecasts by 11.6% for 2016 and 15.5% for 2017 due to higher cost of services. 


VALUATION/RECOMMENDATION 

  • Maintain HOLD. 
  • Our target price of S$3.80 is based on DCF (COE: 6.25%, terminal growth: 1.0%). Entry price is S$3.30. 


SHARE PRICE CATALYST 


  • Attractive dividend yield of 5.3%. 
  • Recovery in residential broadband services. 
  • Investors flocking back to StarHub if there is no fourth mobile operator.



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-17
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 3.80 Down 3.82


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