StarHub - DBS Research 2016-05-16: Limited downside risk

StarHub - DBS Research 2016-05-16: Limited downside risk STARHUB LTD CC3.SI 

Starhub - Limited downside risk

  • Net profit of S$92.8m (+26% y-o-y, +15% q-o-q) was in line.
  • Broadband and enterprise fixed line likely to offset weakness in mobile and pay TV.
  • Upgrade to HOLD with 6% yield due to limited downside.


The counter has dropped c. 20% since April 2015. 

  • The drop has been due to the potential entry of a fourth mobile player with spectrum auction in 3Q16. However, due to a more diversified product portfolio, bundled product offering and less price-sensitive customer base, the counter has fared better than M1. 
  • The recovery of broadband and growth in enterprise fixed line are likely to stabilise the top line over FY16/FY17.


Cost savings helped to grow the bottom line. 

  • 1Q16 net profit of S$92.8m (+26% y-o-y, +15% q-o-q) was on the upper side of S$88-90m. Lower handset sales resulted in lower handset subsidies (-30% y-o-y, -24% q-o-q), which benefitted the bottom line. 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.


Limited downside risk. 

  • Our base-case TP of S$3.30 assumes a 4% adverse impact on StarHub’s revenue due to the fourth player in 2022, with EBIT margins falling to 18% versus 20% currently. Under our bear-case scenario, we assume a 6% adverse impact on revenue in 2022, with EBIT margins dropping to 17%. Our bear-case TP is S$3.00. 
  • Under our bull-case scenario, we assume that there is no entry of a fourth telco and no adverse impact on StarHub’s revenue in 2022, although EBIT margins may slip to 19%. Our bull-case TP is S$4.10.


Valuation:

  • We upgrade StarHub to HOLD with an unchanged TP of S$3.30 (WACC of 7.0%, terminal growth 0%). The stock offers an attractive 6% yield.


Key Risks to Our View:

  • Non-entry of fourth mobile player. The reason could be unsuccessful HetNet trails or an inability to raise adequate funding. 
  • Without HetNet, capex requirements could increase significantly while an inability to raise adequate funding by the new entrant could lead to a relief rally for StarHub.




Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-05-16
DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 3.30 Same 3.30


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