Starhub - CIMB Research 2016-11-03: 3Q16 Struggling to find topline growth

STARHUB LTD CC3.SI

Starhub - 3Q16: Struggling to find topline growth

3Q16 results were in line. As expected, DPS of S$0.05 was declared.
Mobile & Pay TV revenues remain under pressure. Previous bright spots for revenue growth – Broadband and Enterprise Fixed – are losing their shine.
Maintain Hold and DCF-based target price of S$3.70.

3Q16 EBITDA dipped 10.4% yoy (-7.1% qoq) on lower service revenue and National Broadband Network (NBN) adoption grants.
Core net profit also tumbled 19.1% yoy (-14.6% qoq) in 3Q16. 9M16 core EPS came in at 80%/78% of our/consensus FY16 forecasts. This is in line as we expect weaker 4Q16 on higher handset subsidies. As expected, a DPS of S$0.05 was declared (3Q15: S$0.05).

Mobile service revenue fell a steeper 3.6% yoy in 3Q16 (2Q16: -1.8%, 3Q15: -0.1%) due to continued decline in IDD, domestic voice and roaming usage. While there has been healthy take-up of its data upsize offer, StarHub says that this was not the cause of the 3% yoy erosion in postpaid ARPU as it did not see significant downtrading activities.
Pay TV revenue fell 3.7% yoy (-1.9% qoq) as subs declined for the fifth consecutive quarter by 2.1% qoq. This was due to the emergence of alternative viewing platforms and larger out-of-contract subs base in 3Q16.

While broadband revenue rose yoy for the fifth consecutive quarter, growth tapered off to only 0.6% qoq. ARPU was flat qoq (+8.8% yoy) after rising in the four preceding quarters, while net adds were only a marginal 2k (+0.4% qoq).
Enterprise fixed revenue fell 2.9% yoy (-1.3% qoq) due to lower Voice usage.

EBITDA margin on service revenue eased 3.0% pts yoy (-2.0% pts qoq) to 32.7%.
Besides lower service revenue and NBN adoption grants, cost of services (NBN fiber lease) and Enterprise bad debts also rose yoy.

We maintain our Hold rating and DCF-based target price of S$3.70 (WACC: 7.1%).
This is based on the mid-point between the valuation under the scenario of a fourth mobile player entering the market (S$3.20) and status quo (S$4.20), although we believe there is a high chance of the former scenario materialising.
StarHub’s FY17F EV/OpFCF of 13.7x is at a 6% discount to the ASEAN telco average. Key upside/downside risk is the non-entry/emergence of a fourth mobile operator.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2016-11-03

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 3.700 Same 3.700