StarHub - DBS Research 2016-05-06: Solid earnings; less exciting operating metrics

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STARHUB LTD CC3.SI 

StarHub - Solid earnings; less exciting operating metrics

• 1Q16 net profit of S$92.8m (+26% y-o-y) was better than our S$88-90m estimate due to the larger cost savings.
• Mobile segment gained subscribers but Broadband & Pay TV segments lost subscribers on a worrying note.
• Management maintains its 20-Sct dividend guidance for 2016. We retain our Fully Valued call with unchanged TP of S$3.30.

Cost savings were better than expected. 

• 1Q16 net profit of S$92.8m made up 25% of our full-year forecast. Handset subsidies decreased significantly due to lower sales of equipment. 
• Besides, StarHub also managed to reduce its 
  1. marketing costs with the use of better data analytics, and 
  2. cost of services by lowering programming and production costs.

Broadband and Pay TV lost subscribers. 

• Pay TV business lost 8K subscribers to reach 528K as StarHub stopped its “TV Lite” promotions, resulting in a slight dip in Pay TV revenue. 
• Netflix also entered the market in early 2016, so it can also be attributed to Netflix’s entry in our view. 
• Broadband business lost 3K subscribers to reach 473K although revenue inched up slightly due to higher ARPU from increased take-up of fibre broadband plans. 
• The loss of Pay TV and Broadband subscribers may undermine Starhub's hubbing strategy and we expect the company to be more aggressive to retain or grow its subscriber base.

Adoption grant may decline in the subsequent quarters. 

• 1Q16 benefitted from S$12.6m in “Other income” most of which came from Adoption grant for fibre broadband take-up. 
• Management expects the Adoption grant to decline in FY16F and we estimate that “Other income” could drop to S$26m in FY16F from S$46.5m in FY15. As such, subsequent quarters are likely to see smaller Adoption grants going forward and hence we retain our full-year profit forecast of S$370m for FY16F.

We keep our Fully Valued rating on StarHub with TP of S$3.30. 

• Our bull-case TP in case of non-entry of a 4th mobile player is S$4.10, while our bear-case TP in the case of an aggressive 4th mobile player is S$3.00.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-05-06

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