Starhub - CIMB Research 2017-05-04: 1Q17 Weak Trends Persist

Starhub - CIMB Research 2017-05-04: 1Q17: Weak trends persist STARHUB LTD CC3.SI

Starhub - 1Q17: Weak trends persist

  • 1Q17 results were largely in line. A lower quarterly DPS of S$0.04 was declared.
  • Mobile and pay TV declined further while broadband lost its growth momentum.
  • EBITDA margin fell 5.0% pts yoy, hit by higher cost of services & device subsidies.
  • FY17F-19F core EPS cut by 1-10% to factor in high price of the 700MHz licence.
  • Maintain Reduce with a 6% lower target price of S$2.45. Good entry point is below S$2.15 (bear case) and exit point above S$2.75 (bull case).

1Q17: Results largely in line; lower quarterly DPS declared 

  • Excluding one-off staff cost reversal, 1Q17 EBITDA tumbled 15.7% yoy (+6.8% qoq) on lower service revenue and National Broadband Network (NBN) grants and higher opex.
  • Core EPS fell a bigger 26.8% yoy (+10.6% qoq) on higher depreciation and interest costs. 
  • Results were largely in line, with 1Q17 EBITDA/core EPS at 24%/24% of our FY17 forecasts (consensus: 24%/24%). 
  • As per its previous guidance, StarHub declared S$0.04 DPS in 1Q17, lower than in previous quarters (1Q16: S$0.05).

Continued decline in mobile and pay TV revenue 

  • Mobile service revenue fell 0.6% yoy (-5.0% qoq) in 1Q17 due to the decline in roaming and IDD usage, which was partly offset by higher subscription revenue from: 
    1. 2.4% pts yoy rise in subs on tiered plans to 67.8%, and 
    2. 4.1% yoy growth in subs base. 
  • Pay TV revenue fell further by 6.8% yoy (-5.9% qoq) as subs declined for the seventh successive quarter by 2.2% qoq due to the continued impact of piracy and alternative over-the-top (OTT) viewing platforms.

Lacklustre broadband revenue; fixed enterprise remains healthy 

  • Broadband revenue was largely flat yoy and down for the second consecutive quarter by 0.9% qoq. 
  • ARPU remained flat qoq (+2.8% yoy) at S$37 for the fourth quarter in a row while subs continued to trend downwards, falling 3k qoq (-0.6%), reflecting intense market competition. 
  • Fixed enterprise revenue rose a mild 3.0% yoy (-7.9% qoq) as higher data and internet (+6.6% qoq) was offset by lower voice revenue (-18.2% yoy).

EBITDA margins largely affected by higher cost of services 

  • The EBITDA margin on service revenue was down a steep 5.0% pts yoy (+3.3% pts qoq) to 28.8% (normalised for one-off staff cost reversal). This was mainly due to higher 
    1. cost of services (NBN fiber lease, managed services in fixed enterprise and content cost), and 
    2. device subsidies on higher sales volume. 
  • Given the declining pay TV subs base, StarHub accelerated the amortisation of content cost in the earlier years of content renewal, leading to the rise in content cost.

FY17F-19F core EPS cut by 1-10% 

  • We cut FY17F-19F core EPS by 0.8-9.5% due to higher amortisation and interest cost arising from the high price of S$282m for the 700MHz (2x15MHz) spectrum, which is likely to be paid in 2H18. 
  • Post the revision, we forecast EBITDA/core EPS to decline at 3-year CAGR of 3.9%/13.2% between FY16 and FY19F.

Maintain Reduce with a 6% lower DCF-based target price of S$2.45 

  • Factoring in the higher-than-expected spectrum payments, we lower our DCF-based target price by 5.8% to S$2.45 (WACC: 7.1%) and maintain our Reduce rating. 
  • Its 15.8x FY17F EV/OpFCF is at a 7% discount to the ASEAN telco average, which we think is justified given its future earnings risk. 
  • A good entry point would be below S$2.15 (bear case) and exit point above S$2.75 (bull case). 
  • A key upside risk is lower-than-expected impact from the entry of TPG.

FOONG Choong Chen CFA CIMB Research | 2017-05-04
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 2.45 Down 2.600