StarHub Ltd - OCBC Investment 2017-03-17: Harder to breathe in a crowded market

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STARHUB LTD CC3.SI

StarHub Ltd - Harder to breathe in a crowded market

• Mobile and Pay TV under pressure.
• Lower ARPU assumptions.
• Maintain SELL with lower FV.

55% of FY16 service revenue from mobile business 

• Based on FY16 results, StarHub Ltd (StarHub) has substantial exposure to Singapore’s mobile market, with ~55% of its FY16 service revenue (excludes sale of equipment) derived from mobile business. 
• Assuming majority of its sale of equipment revenue was derived from handset sales, Starhub’s total mobile exposure will then be at a higher 58.5% of its FY16 total revenue. Hence, we expect intensifying competition given the impending 4th telco entry will have a material impact on Starhub, especially in a saturated Singapore mobile market.

Expects post-paid ARPU to decline 15% by CY21 

• While there will only be four telcos with spectrum holdings in Singapore offering mobile services, we believe Singapore’s only Mobile Virtual Network Operator, Circles.Life, is also one not to be taken lightly. 
• In our view, the incumbents and Circles.Life, are expected to engage in aggressive marketing campaigns and promotional activities to try to gain as much market share as possible (by locking in customers on new two-year contracts) before TPG launches mobile services in 2018. For instance, Circles.Life recently offered new customers additional 20GB for only S$20 in a bid to increase subscriber base. With the worsening competitive landscape of mobile industry, we now forecast for Starhub’s post-paid ARPU to decline 15% over the next five years (prev: - 13.7%). 
• In addition, we expect weakness over its Pay TV business to persist and forecast for declining subscriber base with the increasing adoption of over-the-top (OTT) services as well as piracy.

Lower FV of S$2.50 

• For the upcoming General Spectrum Auction targeted to complete in 1Q17, we expect Starhub to exercise its right of first refusal for 2x5MHz of 900MHz spectrum for S$20m, win 2x10MHz of 700MHz spectrum for S$60m, and win 2x15MHz of 2.5GHZ spectrum for S$13.5m. 
• As we update our assumptions, we cut our FY18F PATMI by 4.7% and lower our FV to S$2.50 (prev: S$2.65). Maintain SELL given the weak earnings outlook.
• We also see further downside to Starhub’s S$0.04/quarter dividend beyond FY17 if earnings fall more than expected.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-03-17

OCBC Investment SGX Stock Analyst Report SELL Maintain SELL 2.50 Down 2.650