Starhub - CIMB Research 2016-08-04: No topline growth

STARHUB LTD CC3.SI

Starhub - No topline growth

2Q16 in line. 2H16 earnings to be weaker due to subsidies and lower NBN grants.
Mobile service revenue fell 1.8% yoy on lower roaming and IDD/SMS usage.
Fall in pay TV subs accelerating due to OTT video and termination of TV Lite promo.
Broadband and enterprise fixed revenues continued to grow yoy and qoq.

Maintain Hold. Target price raised by 16% to S$3.70 to factor in the possibility that a fourth mobile operator may not materialise.

EBITDA fell 1.3% yoy (+4.7% qoq) in 2Q16 on slightly higher opex and lower other operating income. Core net profit grew 1.6% yoy (+8.5% qoq) in 2Q16, with 1H16 at 55%/ 55% of our/consensus FY16 forecasts.
The results are in line as we see a weaker 2H16 due to higher handset subsidies and lower NBN adoption grants. A DPS of S$0.05 was declared (2Q15: S$0.05).
StarHub has revised its 2016 guidance to flat service revenue growth (previous: low single-digit) and 32% EBITDA margin (previous: 31%).

Mobile service revenue was down 1.8% yoy in 2Q16 due to a decline in voice roaming and IDD/SMS usage.
Qoq, mobile revenue was up 2.4% as a) postpaid and prepaid subs grew by 1.5% (+20k) and 2.0% (+17k), respectively, and b) postpaid average revenue per user (ARPU) was up 2.9% as subs on tiered plans rose by 1% qoq to 66% (2Q15: 63%), out of which 24% exceeded their data bundles (1Q16: 22%, 2Q15: 22%).

Pay TV revenue fell 2.5% yoy (+0.5% qoq) due to a 5.0% decline in subs during the quarter. Qoq, the drop in subs accelerated to 10k (-1.9%), the fourth consecutive quarter of decline. This can be attributed to the emergence of alternative video platforms (e.g. NetFlix) and the termination of its TV Lite promo.

Broadband revenue rose 11.0% yoy and grew sequentially (+1.7% qoq) for the sixth consecutive quarter. This was driven by ARPU rising 12.1% yoy (+2.8% qoq) due to subs upgrading to higher-speed plans upon contract expiry.
Nevertheless, competition remains intense with no subs growth qoq.
Meanwhile, enterprise fixed revenue continued to grow steadily by 2.0% yoy (+2.9% qoq).

EBITDA margin on service revenue eased 0.4% pts yoy to 34.7% but rose 0.9% pts qoq mainly due to lower traffic, repair & maintenance, and other costs.
We see margins declining hoh in 2H16 on higher handset subsidies (iPhone 7 launch) and marketing cost (festivities in 4Q) and much lower National Broadband Network (NBN) adoption grants.

DCF-based target price raised by 15.6% to S$3.70 (WACC: 7.1%) given recent market talk that potential bidders for the fourth mobile licence may not be able to raise sufficient funding for the spectrum auction. This is based on the mid-point between our DCF- based fair value in the scenario of a fourth mobile player entering the market (S$3.20) and status quo (S$4.20), as we are unable to rule out either outcome for now.
Maintain Hold.
Key up/downside risk is the non-entry/emergence of a fourth mobile operator.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2016-08-04

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.70 Up 3.20