StarHub - Maybank Kim Eng 2016-08-04: Strong In The Right Places

StarHub - Maybank Kim Eng 2016-08-04: Strong In The Right Places STARHUB LTD CC3.SI 

StarHub - Strong In The Right Places


Still positive on enterprise growth; maintain BUY

  • The enterprise business continued to grow in 2Q16, with traction to be added with more services, such as cyber-security. Enterprise margins are also comparable to consumer services such as mobile and Pay TV. They remained under pressure but costs can be reduced to preserve profitability. 
  • As long as enterprise continues to grow and the costs of its consumer businesses can be managed, we remain positive on StarHub. 
  • We reiterate BUY with DCF-based TP of SGD4.15 (WACC 6.5%, LTG 1%).


2Q in line; revenue growth & margins diverge

  • Service revenue and core NP were flat in 2Q16, excluding a SGD9.5m fair value gain for a 9% stake in listed content producer mm2, acquired at lower prices. 
  • Mobile and Pay TV revenue fell, but we are not overly concerned, as the costs of offering these services are variable enough for StarHub to maintain margins. More importantly, they were bolstered by growing fixed enterprise and broadband business. As a result, EBITDA margin rose to a 3-qtr high of 34.7%, despite 0.1% dip in service revenue.


Raising forecasts slightly despite lowered guidance

  • Although service revenue guidance is cut from “single digit growth” to “2015’s level”, we raise FY16 core NP forecast slightly. 
  • Service revenue is expected to be flat on lower mobile and Pay TV revenue. However, softer roaming revenue is the main culprit behind lower mobile revenue, where profitability should be maintained due to lower interconnect tariffs. Similarly for the Pay TV business content costs can also be adjusted down, in line with lower revenue.


Fixed Enterprise intact and growing

  • 2Q enterprise growth was encouraging at c.2% and the segment remained StarHub’s second largest contributor after mobile, having recently overtaken Pay TV. 
  • A growing customer base will allow StarHub to add more corporate services and cross-sell them to other customers as well. 
  • In addition, margins are better as customer acquisition and retention costs are lower.


Swing Factors


Upside

  • No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco.
  • Merger with M1 could add heft and resources to compete against Singtel and fourth mobile operator.

Downside

  • Could lose some marginal mobile market share to a new entrant. M1 is expected to lose the most.




Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-04
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 4.15 Same 4.15


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