StarHub (STH SP) - Maybank Kim Eng 2017-02-06: When It Rains, It Pours

STARHUB LTD CC3.SI

StarHub (STH SP) - When It Rains, It Pours

4Q16 was below expectations on higher costs, and 2017 guidance is also below.
We slash EBITDA margin on service revenue from >30% to 26-28% due to a structural increase in staff and content costs.
DPS will also be cut 20% to 16 cents. We believe the motivation to invest heavily in service and content differentiation this year, even to the extent of reducing dividends, is related to the potential threat of an earlier entry by the fourth operator.
FY17-19 NP forecasts are cut by 37%/34%/32% and DCF-based TP by 30% to SGD2.49 (WACC 5.5%, LTG 0.5%).

Although revenue was in line, 4Q16 profit was below our forecast due to higher-than-expected opex, mainly handset subsidies, provision for doubtful debt and “others”, which included a SGD7.3m forex loss on USD content costs.
EBITDA margin fell to 23.9%, down 4ppt. As a result, FY16 NP fell 8% YoY to SGD341m, 6.5% short of our full-year forecast of SGD365m. The outperformers remained broadband (+8%) and enterprise fixed (+4%), while mobile and Pay TV fell 2% and 3.4% respectively.

Although StarHub guided for flat revenue in FY17, the surprise was in costs, which are expected to be structurally higher in the next three years, coming mainly from:
1. staff costs, as it invests in ways to differentiate in customer service; and
2. content costs, due to the impact of a stronger USD.
We have highlighted USD cost of content as a risk before.
Capex was maintained at 13% of revenue, but staff and content costs already comprise almost 30% of revenue. As a result, it will also cut FY17 DPS by 20% from 20 cents to 16 cents.

Although TPG (TPM AU, Not Rated) is expected to enter the mobile market only in 2018, management noted that it could come in earlier in other areas, such as broadband. If so, competition could set in earlier than expected. We believe part of management’s motivation to invest heavily in service and content differentiation this year, even to the extent of reducing dividends, is related to this potential threat.
Confirmation could come if TPG decides to participate in the General Spectrum Auction, likely to be held in Mar 2017.

Fourth telco does not participate in General Spectrum Auction. All three incumbents keep most of their spectrum allocations.
Merger or collaboration with M1 could add heft and resources to compete against Singtel and fourth mobile operator.

Could lose some mobile market share to a new entrant.
M1 is expected to lose the most.
Greater-than-expected rise in operating costs could lead to even greater squeeze in margins, further endangering dividends.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-06

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