Starhub - DBS Research 2016-11-02: Lower grant could hurt earnings

STARHUB LTD CC3.SI

Starhub - Lower grant could hurt earnings

We project a 7% 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.
We expect StarHub’s mobile revenues to decrease by 15% (8% drop in total revenue) and earnings to contract by 16% in 2022 versus 2015.

StarHub’s earnings have been cushioned by an estimated S$35-40m grant each year (~10-12% of group earnings) for National Broadband Network (NBN) as StarHub’s subsidiary is the Operating Company (OpCo) for NBN. However, NBN-related grants are coming to an end over next 3-6 months, which may lead to earnings contraction from FY17F onwards.

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%.

Recommend FULLY VALUED with lower TP of S$2.80.
Our revised DCF-based (WACC 6.5%, terminal growth 0%) TP is S$2.80 as we factor in the impact of reduced NBN grants. In the scenario of potential earnings decline, we think forward PER multiple of telcos could shrink to 13-14x (below -2SD) versus 17x 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$3.70

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2016-11-02

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