Starhub - CIMB Research 2017-02-04: FY17 guidance and DPS cut are negative surprises

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Starhub - FY17 guidance and DPS cut are negative surprises

FY16 core EPS largely in line. FY17 guidance was a negative surprise; StarHub guided for 4-6% pts drop in EBITDA margin and cut its DPS projection to S$0.16.
Mobile & Pay TV stayed under pressure. Only real bright spot is Fixed Enterprise.
EBITDA margin fell by 2.4% pts yoy, dented by aggressive device subsidies.
FY17F/18F core EPS cut by 22%/4%. DPS reduced by 20% to S$0.16 p.a.

Downgrade to Reduce; target price cut by 19% to S$2.60. Good entry point is below S$2.30 (bear case) and exit point above S$2.90 (bull case).

4Q16 EBITDA dipped 7.8% yoy (-18.9% qoq) on lower National Broadband Network (NBN) adoption grants, and higher device subsidies and licence fees.
Core EPS fell a bigger 13.1% yoy (-28.4% qoq) as depreciation and interest costs rose.
Results were largely in line, with FY16 core EPS 3%/4% below our/consensus forecasts.
A S$0.05 DPS was declared, bringing FY16 DPS to S$0.20.
For FY17, StarHub guided for a 4-6% pts drop in EBITDA margin on flat service revenue and cut DPS to S$0.16.

Mobile service revenue fell 0.4% yoy (+4.1% qoq) in 4Q16 due to roaming/local voice usage decline, offset by 5.5% yoy growth (+1.4% qoq) in subs base.
Pay TV revenue fell 6.1% yoy (+0.3% qoq) as subs declined for the sixth consecutive quarter by 1.8% qoq due to alternative over-the-top (OTT) viewing platforms and piracy.

Broadband revenue grew 4.0% yoy, but fell 0.9% qoq after seven consecutive quarters of growth.
ARPU was flat qoq (+5.7% yoy) at S$37 for the third quarter in a row, while subs fell 2k qoq (-0.4%). This implies that broadband revenue may not contribute to future topline growth.
Fixed Enterprise revenue soared 9.4% yoy (+8.9% qoq) due to more projects and a higher rate of completions.

EBITDA margin on service revenue fell 2.4% pts yoy (-7.2% pts qoq) to 25.5%. This was mainly due to:
1. a drop-off in NBN adoption grants;
2. catch-up in 4G licence fees; and
3. higher device subsidies.
The rise in device subsidies was because StarHub lowered its average selling prices to acquire/retain subs, including Corporate Enterprise customers.

We cut FY17/18F core EPS by 21.8/4.3% to reflect lower service revenue and EBITDA margin, and higher interest expense. We now expect FY17F core EPS to fall 17.9% due to the absence of NBN grants and higher device subsidies driven by iPhone 8 and sub retention activities.
Core EPS should be flat in FY18F (lower handset sales), then fall 11.9% in FY19F due to more competition.
FY17-18F DPS cut by 20% to S$0.16.
From FY19 onwards, we expect capex/sales to drop to 10% due to network sharing with M1.

We downgrade StarHub from Hold to Reduce with a 19% lower DCF-based target price of S$2.60 (WACC: 7.1%).
We believe StarHub’s pessimistic FY17 guidance and DPS cut are negative surprises that could de-rate the share price. Its 16.5x FY17F EV/OpFCF is roughly in line with the ASEAN telco average, but unjustified given its future earnings risk.
A good entry point would be below S$2.30 (bear case) and exit point above S$2.90 (bull case).
Key upside risk is less-than-expected impact from the entry of TPG.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2017-02-04

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