Starhub - CIMB Research 2016-05-05: Lacking topline growth

STARHUB LTD CC3.SI

Starhub - Lacking topline growth

1Q16 results were in-line. Weaker 2H16 expected on higher handset subsidies.
Mobile revenue was weaker yoy & qoq due to decline in Voice roaming/IDD/SMS.
Growing broadband & enterprise fixed revenue offset weakness in mobile & pay TV.

EBITDA margin jumped yoy & qoq on lower handset subsidies & marketing cost.
Maintain Hold. DCF-based target price cut by 11% to S$3.20. Lacks catalysts.

1Q16’s EBITDA rose 13.1% yoy (+16.8% qoq) on higher margins.
Core net profit grew 14.9% yoy (+25.9% qoq) and was in-line at 26.4%/26.5% of our/consensus FY16 forecasts.
We expect weaker 2H16 earnings due to higher handset subsidies, and once NBN adoption grant is fully exhausted.
A DPS of S$0.05 was declared (1Q15: S$0.05).

Revenue for the core mobile business was down 2.4% yoy (-4.8% qoq) due to a decline in Voice roaming and IDD/SMS usage.
With roaming still accounting for 10% of mobile revenue and steadily declining, continued substitution of IDD/SMS with data services and some price pressure from recent offers (data upsize and sim-only plans), we believe the outlook for mobile revenue growth remains dim in FY16-17.

Broadband revenue rose 11.2% yoy and grew sequentially (+2.7% qoq) for the fifth consecutive quarter. This was driven by ARPU rising 9.1% yoy (+2.9% qoq) as competition is now focused on higher-speed packages.
Enterprise fixed revenue grew steadily by 5.4% yoy (-2.2% qoq).

Cable TV revenue fell 1.1% yoy (-5.1% qoq) on 3.1% yoy lower subs.
Qoq, this was the third consecutive quarter of a subs decline, with a total of 17k subs lost since 2Q15.
StarHub said this was due to the termination of its TV Lite promotion, which will also impact its subs base over the next two quarters. It has not seen its subscribers terminating or downgrading their packages due to OTT video streaming services.

EBITDA margin on service revenue jumped 3.8% pts yoy (+5.9% pts qoq) to 33.8% largely due to lower handset subsidies (on lower handset sales) and marketing cost.
We expect margins to decline in the coming quarters due to higher handset subsidies, and once StarHub stops booking in NBN adoption grants.

We cut our DCF-based target price by 11.1% to S$3.20 (WACC: 7.1%) as we use a lower terminal growth rate of 1.0% (2.0% before) given a muted earnings growth outlook in line with our assumption for M1/SingTel.
We see a lack of catalysts for StarHub given the slight decline in core FY16F net profit.
We do not expect a hike in the annual DPS or special dividends in FY16-18F as FCF should not exceed S$0.20 given the high capex, spectrum fee payments, and competition from a potential fourth mobile new entrant.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-05

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.20 Down 3.60