StarHub - UOB Kay Hian 2016-05-06: 1Q16 Revenue Headwinds Broaden, But Saved By Lower Subsidies

StarHub - UOB Kay Hian 2016-05-06: 1Q16 Revenue Headwinds Broaden, But Saved By Lower Subsidies STARHUB LTD CC3.SI 

StarHub (STH SP) - 1Q16: Revenue Headwinds Broaden, But Saved By Lower Subsidies

  • Revenue contraction has broadened from mobile to pay-TV. 
  • Bottom-line was saved by lower handset subsidies due to the limited range of new smartphones available. 
  • We expect the last tranche of adoption grant for NGNBN to be processed and paid by iDA in 2Q16. Thus, earnings headwinds could intensify in 2H16. 
  • Maintain SELL. Target price: S$3.03.



RESULTS


  • StarHub reported net profit of S$92.8m for 1Q16, in line with our forecast of S$90m.

• Contraction in mobile revenue continues. 

  • StarHub gained a respectable 19,000 post-paid subscribers and post-paid ARPU was sustained at a healthy S$69/month. 
  • The drag from pre-paid segment worsened as StarHub lost 7,000 pre-paid subscribers due to expiry of 6-month validity period. Pre-paid ARPU also declined S$1 or 5.6% yoy to S$17 due to substitution from usage of OTT voice. 
  • We estimated that revenue from the post- paid and pre-paid segments declined by 1% and 11% yoy respectively.

• Pay TV loses traction. 

  • StarHub lost 8,000 pay-TV subscribers, the third consecutive quarter of contraction in its pay-TV subscriber base. 
  • Management explained that the promotion for TV Lite package has ended. However, we believed this could be a secular decline driven by change in viewers’ habits in consumption of content.

• Continued recovery for Residential Broadband. 

  • StarHub lost 3,000 broadband customers due to intense competition but ARPU increased S$1 qoq and S$3 yoy to S$36/month due to conversion to higher speed plans. This is the fifth consecutive quarter of sequential revenue growth from residential broadband.

• Steady growth from Enterprise Fixed. 

  • Revenue from Data & Internet grew 5.1% yoy driven by managed services, cloud solutions and domestic data lines. 
  • Revenue from voice increased 7% due to new contracts for international voice.

• Hubbing has lost its lustre. 

  • The erosion of its pay-TV subscriber base has reduced the number of households using multiple services. 
  • The number of triple-hubbing households has declined 2,000 yoy. Similarly, double-hubbing households also decreased 6,000 yoy.

• Saved by lower subsidies. 

  • Handset subsidy was S$55.6m (our forecast: S$61.8m), lower than S$79.5m last year. 
  • Management expects the reduction in handset subsidy for 1Q16 to reverse in subsequent quarters.

• Opex efficiency. 

  • Cost of service decreased 2.3% yoy due to rationalisation of pay-TV programming costs. 
  • Marketing & promotions expenses decreased 18% yoy due to usage of data analytics to design targeted advertising and promotions. EBITDA margin was healthy at 33.8%.



STOCK IMPACT 



• Muted outlook for 2016. 

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

• Strengthening indoor coverage. 

  • StarHub has expanded its network to over 100 macro base stations and small cells at downtown Marina Bay area. 
  • Its Heterogeneous Network (HetNet) utilises a mix of macro base stations, small cells and enterprise-grade WiFi access points to provide seamless coverage. Small cells cover a range of only a few hundred meters but are ideal for filling mobile coverage gaps. With its small cell base stations and combined 55MHz of frequency spectrum across 1800MHz, 2100MHz and 2600MHz bands, StarHub achieved indoor coverage at 1Gbps using 3-component carrier aggregation.

• Netflix not able to cannibalise StarHub’s pay-TV business. 

  • StarHub has entered into a partnership with Netflix to offer its fibre-TV customers access to Netflix through their set-top boxes, which will start in 2Q16. Subscription to Netflix is offered to StarHub’s mobile and broadband customers at Netflix’s prevailing pricing plans (basic: S$10.98, standard (HD): S$13.98 and premium: S$16.98). Customers also have the option to charge their Netflix subscription to their StarHub bills.
  • According to The Straits Times, the local version of NetFlix only has 12% of NetFlix’s library of 4,500 movies and 17% of over 1,000 TV shows available in the US. NetFlix faces tough local competition in many Asian markets. It experiences complications from censorship, programming rights and lack of local content. At the moment, NetFlix is incurring losses for its overseas operations.

• Growth from Enterprise Fixed. 

  • StarHub provides connectivity (Ethernet, DWDM and leased lines) and managed services (data centres 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.


EARNINGS REVISION/RISK


  • We maintain our existing earnings forecast.


VALUATION/RECOMMENDATION


• Maintain SELL. 

  • We have done a scenario analysis based on two possible outcomes: Best Case: No new entrant, and Worst Case: A fourth mobile operator disrupts the status quo. We attribute a probability of 50% for Best Case and 50% for Worst Case. 
  • Our probability-weighted target price is S$3.03 (Best Case: S$3.75, Worst Case: S$2.30). The risk-reward trade-off is unfavourable with potential upside of 13.6% vs potential downside of 30.3%.
  • Our target price is based on DCF (COE: Best Case 6.25%, Worst Case 7.25%, and terminal growth: Best Case 1%, Worst Case 0%).


SHARE PRICE CATALYST

  • Attractive dividend yield of 6.1%.
  • Erosion for mobile and pay-TV businesses.
  • Risk from potential entry of a fourth mobile operator.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-06
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 3.03 Same 3.03


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