Starhub - RHB Invest 2016-08-04: Broadly in line, making good strides in cost rationalisation

Starhub - RHB Invest 2016-08-04: Broadly in line, making good strides in cost rationalisation STARHUB LTD CC3.SI 

1HY16 Results Flash Note: Broadly in line, making good strides in cost rationalisation.

  • 1HFY16 core earnings (adjusted for forex and fair value gains on its investment in MM2) and EBITDA formed 55-56% and 52% of our/consensus estimates respectively. 
  • While nos. appear to track slightly ahead of expectations, the high 1H EBITDA margin of 34.2% (2Q16: 34.7%) is not sustainable on the back of 
    1. the deceleration in NGN adoption grants (to be completely absolved by end- FY16), 
    2. seasonally higher handset subsidies (Samsung Note 7/iPhone 7 launch) and A&P in 2H. 
  • An expected 5 cent/share DPS was declared.

Key Highlights/Takeaways

  • Management has fine-tuned full year guidance- service revenue growth likely to be flat (vs. ‘low single digit’ growth previously) and service EBITDA margin of 32% (from 31%). This would imply a slightly better EBITDA run-rate, rationalised on cost management efforts.
  • Overall 1HFY16 service revenue was flat YoY but EBITDA expanded 5.3%, mainly on lower traffic cost (-10%).
  • Enterprise segment which overtook pay-tv as the 2nd largest revenue contributor at 17% continues to be the bright spot, up 4% YoY in 1HFY16 from new digital services and opportunities within an expanded fiber footprint.
  • Structural weakness in roaming/usage revenues continue to crimp mobile revenue (51% of group revenue), down 2.1% YoY in 1HFY16. Sequential improvement of 2.1% is off a low base in the March quarter.
  • Postpaid ARPU rose SGD1 YoY from a higher proportion of customers on tiered data plans (2Q16: 64%) and exceeding their monthly data caps (2Q16: 24%).
  • SIM-only plans launched in 3Q15, whilst popular (no specifics in terms of take-up), is less intrusive on ARPU than initially thought with contractual plans still favoured.
  • Response to the Plus 3 (additional 3GB data for SGD6/mth) data add-on packages introduced recently has been positive and should contribute to better ARPU uplifts going forward.
  • Pay-tv business continues to see revenue pressure (-2% YoY) from a bigger % of customers going out of contracts and cannibalisation of alternative/digital platforms. The focus will continue to be on offering relevant content to viewers with non-popular content hived-off to save on content cost.
  • Fixed broadband (FBB) revenue was up 11% YoY on a 12% ARPU uplift as more customers re-contract on higher speed plans. 69% of its FBB base is now on fiber.
  • Capex/sales guidance of 13% excludes a spectrum payment of SGD80m for 1800MHz in 2HFY16.
  • Average data usage per subs/mth widened to 3.3Gb from 3.1Gb in the March quarter.

Our View

  • We retain our forecast with unchanged DCF TP of SGD3.75 (WACC: 7.2%, TG: 1.5%) and NEUTRAL call. 
  • Our forecast has factored in longer-term ARPU dilution from a potential fourth entrant. Valuations at 8.1x FY17 EV/EBITDA are in line with historical mean and supported by the over 5% dividend yield in the current environment of risk aversion. 
  • Sentiment on the sector nonetheless continues to be weighed-down by fourth entrant concerns- submission of spectrum bids by Sept 1.

Singapore Research RHB Invest | 2016-08-04
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.75 Same 3.75