Starhub - DBS Research 2016-11-03: Mobile, pay TV declines hit bottom line

STARHUB LTD CC3.SI

Starhub - Mobile, pay TV declines hit bottom line

3Q16 net profit of S$86m (-28% y-o-y, -21% q-o-q) was 4-5% below our expectations
Declines in mobile, pay TV, grants hurt bottom line
Lower grants to impact FY17F further
Maintain FULLY VALUED with a TP of S$ 2.80.

3Q16 net profit of S$86m (-28% y-o-y, -21% q-o-q) was lower than our S$90m-95m expectations.
Lower revenues from mobile and pay TV, coupled with reductions in adoption grant, resulted in a weaker bottom line.
Lack of one-off gains (S$15m in 3Q15, S$9.5m in 2Q16) also contributed to the profit drop. Excluding one-offs, net profits would have been 17% and 13% lower y-o-y and q-o-q respectively.

Mobile revenue was down 4% y-o-y and 2% q-o-q due to structural declines in legacy revenue. We suspect a slower growth in data revenue due to the introduction of Plus 3 data plans also contributed to the mobile revenue weakness.
In addition, StarHub has lost 7% of its pay TV subscriber base over the past five quarters. As a result, StarHub’s pay TV revenues declined 4% y-o-y and 2% q-o-q. We believe revenue declines in mobile and pay TV is likely to continue through FY17F.

Other income declined by S$4.2m in 3Q16 versus 3Q15 due to lower adoption grant income. StarHub’s earnings have been cushioned by an estimated S$40m-45m 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 grant is likely to drop significantly in FY17F which may lead to earnings contraction from FY17F onwards.

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.

Our DCF-based (WACC 6.5%, terminal growth 0%) TP is S$2.80.
In the scenario of potential earnings decline, we think forward PER multiple of telcos could shrink to 13-14x (below -2SD) versus 17x now.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2016-11-03

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