Starhub - DBS Research 2016-09-22: More resilient than M1, but not immune

STARHUB LTD CC3.SI

Starhub - More resilient than M1, but not immune

We project a 4% drop in industry-wide mobile revenues between 2015 and 2022, while the new entrant could capture 7% of revenue share.
With only c. 50% of revenues coming from mobile and due to more fixed-mobile-TV bundling, StarHub will be less impacted than M1. As a result, we expect StarHub’s mobile revenues to decrease by 12% (6% drop in total revenue) and earnings to contract by 12% in 2022 versus 2015.

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%.

The 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.

Recommend FULLY VALUED versus HOLD earlier. Our revised DCF (WACC 6.5%, terminal growth 0%) based TP is S$3.00 as we factor the impact of the potential new entrant.
In the scenario of potential earnings decline, we think forward PER multiple of telcos could shrink to 13-14x (below -2SD) versus 16x now.

Non-entry of a new player. Disqualification of the current candidates due to inadequate funding or lack of experience could wipe out the threat of a new player leading to our bull case TP of S$4.00.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2016-09-22

DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade HOLD 3.00 Down 3.650