StarHub Ltd - OCBC Investment 2016-03-31: Upgrade to BUY with new S$3.80 FV

StarHub Ltd - OCBC Investment 2016-03-31: Upgrade to BUY with new S$3.80 FV STARHUB LTD CC3.SI 

StarHub Ltd: Upgrade to BUY with new S$3.80 FV 

  • Down 14% since 16 Feb 
  • Overly negative on prospects? 
  • 20% total return expected 

Likely weighed by lower EBITDA guidance 

  • Post its 4Q15 results announcement on 16 Feb and our downgrade to Hold, StarHub Ltd saw its share price tumble by nearly 14% from S$3.80 to an intraday low of S$3.28 on 11 Mar; this almost undoing all the gains from the stock’s rebound from an intra-day low of S$3.24 on 28 Jan. 
  • While FY15 earnings were within our expectations (+0.9% above our forecast), we suspect that the market may have been disappointed by several factors – the key among them is probably the reduced service EBITDA guidance of 31% in 2016, versus 32.2% achieved in 2015 and 33.7% in 2014. 

May be facing competition on all fronts 

  • Management has cited the more uncertain economic outlook as the reason behind the more cautious guidance, as this may impact its consumer business (mainly Mobile, Pay TV and Broadband services); although it still expects group service revenue to grow in the low singledigit range. 
  • However, we note that there is also the threat of new competition in both the Mobile and Pay TV segments, which could further cloud the picture. 

More so in Mobile, Pay TV businesses 

  • On the Mobile front, the possibility of a new mobile operator has risen considerably in recent days, after MyRepublic (MR) and Consistel reaffirmed their interest to bid for a license. And even before winning a license, an indicative price plan from MR also led the incumbents to allow customers to “upsize” their data bundles for an additional S$6/month; this could herald further price wars in the future. 
  • On the Pay TV front, Netflix has officially entered the Singapore market in 1Q16; while the Pay TV operators like StarHub do not see Netflix as a “direct” competitor, we may see customer loss in the coming quarters. 
  • These operators may also have to re-tweak their pricing model to retain customers. 

Upgrading to BUY 

  • Despite these challenges, we believe that the market may have been overly bearish on StarHub, and could have potentially overlooked the value of its Hubbing strategy and the ability to react to market changes. 
  • Even though we are paring our DCF-based fair value from S$3.94 to S$3.80 to account for higher capex forecasts, we upgrade StarHub to BUY on valuation grounds. 

Carey Wong OCBC Securities | 2016-03-31
OCBC Securities SGX Stock Analyst Report BUY Upgrade HOLD 3.80 Down 3.94