StarHub - UOB Kay Hian 2016-08-04: 2Q16 Maintains Margins Through Cost Rationalisation

StarHub - UOB Kay Hian 2016-08-04: 2Q16 Maintains Margins Through Cost Rationalisation STARHUB LTD CC3.SI 

StarHub (STH SP) - 2Q16: Maintains Margins Through Cost Rationalisation

  • 2Q16 results were aided by one-off gains of S$9.5m from an investment for a 9.1% stake in mm2, and adjustments for accruals that were no longer required for traffic expenses and operating leases. 
  • Mobile, especially the pre-paid segment, and pay-TV are in decline. 
  • Residential broadband was the only bright spot due to migration to fibre broadband and encouraging take-up for higher speed plans. 
  • Maintain SELL. Target Price: S$3.07.


RESULTS

  • StarHub reported net profit of S$108.6m for 2Q16, above our forecast of S$92.1m. The variance was primarily due to a gain of S$9.5m from its investment for a 9.1% stake in mm2.

Pre-paid mobile under pressure. 

  • StarHub gained a respectable 20,000 post-paid subscribers and 17,000 pre-paid subscribers in 2Q16. 
  • Post-paid ARPU increased S$1 yoy to S$71 due to the migration to tiered data plans (2Q16: 65.4% vs 2Q15: 62%). However, pre-paid ARPU dropped S$2 yoy to S$16 due to lower usage for voice and iDD. 
  • We estimate that post-paid mobile revenue grew 0.2% yoy while pre-paid mobile revenue declined 13.6% yoy.

Pay-TV in contraction. 

  • StarHub lost 10,000 pay-TV subscribers in 2Q16, the fourth consecutive quarter of contraction in its pay TV subscriber base. 
  • Management explained that a large number of subscribers’ contracts expired during the quarter. Consumers nowadays have more alternative viewing options and are less reliant on pay-TV. Pay-TV ARPU was stable at S$52.

Continued recovery for Residential Broadband. 

  • Residential broadband subscriber base was unchanged at 473,000. ARPU increased S$4 yoy to S$37 due to conversion to higher speed plans. 
  • Fibre broadband customers increased 51.2% yoy to 328,000 (penetration: 69.3%).

Steady growth from Enterprise Fixed. 

  • Revenue from Data & Internet grew gradually by 3% yoy, driven by connectivity and managed services. 
  • Revenue from voice decreased 4.4% due to lower usage for iDD.

Opex efficiency. 

  • Traffic expenses declined 15.5% yoy (-9.7% yoy if we exclude adjustment for accruals no longer required, difference: S$2m). 
  • Operating leases declined 9.9% yoy (+1.3% yoy if we exclude adjustment for accruals no longer required, difference: S$2.8m). Thus, traffic expenses and operating leases were low due to one-off adjustments. 
  • EBITDA margin was healthy at 34.7%.


STOCK IMPACT


Muted outlook for 2016. 

  • Management has downgraded its guidance on service revenue for 2016 from “low single-digit growth” to “flat”. EBITDA margin is expected to be 32% (previous: 31%). Capex is expected to pick up in 2H16 and account for 13% of total revenue for 2016 (excluding spectrum payment of S$80m).
  • StarHub intends to maintain its annual cash dividend at 20 cents/share.

Strengthening indoor coverage. 

  • StarHub has expanded its network to over 100 macro base stations and small cells at downtown Marina Bay area. Its Heterogeneous Network (HetNet) utilises a mix of macro base stations, small cells and enterprise- grade WiFi access points to fill up mobile coverage gaps and to provide seamless coverage. 
  • With its small cell base stations and combined 55MHz of frequency spectrum across 1,800MHz, 2,100MHz and 2,600MHz bands, StarHub has achieved indoor coverage speed of 1Gbps using 3-component carrier aggregation.

Growth from Enterprise Fixed. 

  • StarHub provides connectivity (Ethernet, DWDM and leased lines) and managed services (data centres services and unified communications) for enterprise customers. It has invested heavily to build its own dedicated fibre network. It will continue to add capacity and expand coverage so as to gain market share over time. This core network also serves as the backhaul transmission network for its mobile services.


EARNINGS REVISION/RISK

  • We raised our net profit forecast by 14.4% for 2016F due to the better numbers in 1H16. 
  • We raised our net profit forecast by 16% for 2017F due to better performance from residential broadband and moderation in costs of handsets.


VALUATION/RECOMMENDATION

  • Maintain SELL. 
  • We have performed a scenario analysis based on two possible outcomes: Best Case - no new entrant, and Worst Case – a fourth mobile operator disrupts the status quo. We attribute a probability of 25% for Best Case and 75% for Worst Case. Our probability-weighted target price is S$3.07 (best case: S$4.40 (previous: S$3.75), worst case: S$2.62 (previous: S$2.30)). The risk-reward trade-off is unfavourable with potential upside of 13.4% vs potential downside of 32.5%.
  • Our target price is based on DCF (COE: best case 6.5% versus worst case 7.5%, and terminal growth: 1.5%).


SHARE PRICE CATALYST

  • Attractive dividend yield of 5.2%.
  • Erosion for mobile and pay-TV businesses.
  • Risk from potential entry of a fourth mobile operator.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-04
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.07 Up 2.30


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