StarHub - Maybank Kim Eng 2016-06-01: Engage Enterprise

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STARHUB LTD CC3.SI 

StarHub (STH SP) - Engage Enterprise

It’s not rocket science, just good risk/reward. Upgrade to BUY

• We upgrade StarHub to BUY on a good risk-reward profile. Our base- and best-case DCF-derived TPs of SGD4.15 (WACC 6.5%, LTG 1%) and SGD4.30 suggest 18% and 22% upside vs downside of 8% to worst-case TP of SGD3.23. 
• Further, the high-margin enterprise business, which has overtaken Pay TV as StarHub’s second largest contributor and should grow further from 16% now to 18% by FY18, will be immune to the risk of a new MNO. 
• Lastly, while we expect ARPUs to fall, game theory suggests the new MNO will be rational in its competition. In the end, M1 is still more vulnerable.

New MNO months away but risk-reward attractive

• We are just a few months away from knowing whether there will be a new MNO entrant into the Singapore telco scene. We think there will be one. But we also think the risk/reward ratio for StarHub is attractive, given the stock’s retreat; its proactive responses so far to the threat of a new MNO and the growth of its Enterprise business.

Engage Enterprise; go where no new entrant can go

• Enterprise fixed business, a high-margin segment second in size only to mobile, is starting to come to the fore. The business is gaining momentum and is on track to grow to 18% of service revenue by FY18, up from 16% now – very useful as it is immune to competition from a fourth MNO. 
• A larger Enterprise business will also help to lock in subscribers and lower operating costs in a way that no new entrant can match.

Competition should still stay rational

• Given the saturated market, the new entrant will need to be aggressive but still stay rational, in our view. Otherwise, it will just be shooting itself in the foot. Asset-heavy MNOs should be incentivised to focus on financial returns. 
• Prices will of course come down and we have already baked in single-digit ARPU reductions in our base forecasts but we think it is unlikely that things will take a steep dive.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-06-01

Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 4.15 Up 4.00