StarHub - DBS Research 2016-08-04: Street numbers to be revised up

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STARHUB LTD CC3.SI 

StarHub - Street numbers to be revised up

• 2Q16 core profit was 5-7% ahead of our estimates.
• FY16 service revenue growth guidance revised to flat (from low-single digit) but raised service EBITDA margin to 32% (from 31%).
• Upgrade to BUY with a revised TP of S$ 4.10 as we see low probability of a new entrant.

Switch to our bull-case valuation due to the low probability of a new entrant. 

• Interested players face difficulty in raising sufficient funds due to three key factors: 
  1. The lack of a domestic roaming agreement, 
  2. Singapore telcos showing their intent to defend their subscriber bases through data price cuts, and 
  3. Potential launch of 5G in 4-5 years will lead to another round of capex, making balance sheet strength even more critical. 
• Interested players have to submit a duly completed Expression of Interest document by 1st September.

2Q16 core profit was 5-7% ahead of our estimates. 

• Excluding fair value gains of S$9.5m, 2Q16 core profit of S$100m (+1% y-o-y, +7% q-o-q) was ahead of our S$93-95m estimate. 
• Higher-than-expected “Other Income” from grants for the fibre adoption and lower-than-expected depreciation & amortisation (D&A) costs were the key variances. 
• StarHub revised FY16 service revenue growth guidance to flat from low-single digit due to decline in Pay TV & roaming revenue but raised service EBITDA margin to 32% from 31%.

Excluding Pay TV segment (18% of service revenue), other segments are healthy. 

• 25-50% lower price for the additional mobile data from March 2016 onwards should boost usage and revenue in the near term while SIM-only plans should reduce handset subsidy burden. 
• Enterprise Fixed business continues to grow due to the need for greater diversity, data analytics. 
• Fixed broadband business has also stabilised due to the fibre adoption. 
• Pay TV business (18% of total) may decline gradually due to more competition from the likes of Netflix.

Valuation:

• Upgrade to BUY at a higher TP of S$4.10 (WACC of 6.5%, terminal growth 0%). 
• While our FY16F/17F earnings are 8%/7% ahead of consensus estimates, more upside potential to our estimates cannot be ruled out.

Key Risks to Our View:

• Successful entry of a new player. A well-funded new entrant could capture 6% revenue share and have a 4% adverse impact on StarHub’s group revenue in 2022, with EBIT margins falling to 18% versus 20% currently.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-08-04

DBS Vickers SGX Stock Analyst Report BUY UPGRADE FULLY VALUED 4.10 Up 3.30