StarHub - DBS Research 2017-10-16: Trading At A Premium

STARHUB LTD CC3.SI

StarHub - Trading At A Premium

Market is not paying enough attention to Circles.Life.
StarHub might need to cut annual DPS to 14 Scts in FY19F to stay below 2.0x net debt to EBITDA.
Maintain FULLY VALUED with a lower Target Price of S$ 2.20.

The number of households subscribing to all three services – pay TV, fixed broadband and mobile – has been declining which has been a critical factor in dictating the stock’s performance.
On valuation, StarHub is expensive at a forward PE of 17.5x (versus sector average of 15x) and 9x EV/EBITDA (versus sector average of 7.5x) as investors tend to value the company in terms of dividend yield.
While StarHub will maintain an annual DPS of 16 Scts in 2017 (6% yield), StarHub’s annual DPS could be cut to 14 Scts in FY19F to stay below 2.0x net debt to EBITDA.

Market is not paying enough attention to Circles.Life and the big divergence between EBITDA and earnings. Circles.Life in its short history of less than 12-months of operations seems to be doing well, supported by its service delivery model and cheaper data pricing.
Moreover, even under the bull-case scenario of StarHub sustaining EBITDA in FY18F/19F, its earnings are set to decline sharply due to sharp rise in amortisation costs as StarHub is set to pay S$350m in total for spectrum acquired in 2017’s general spectrum auction.

Decline in hubbing households in 2H17F and possible changes to StarHub’s mobile plans.
Continued downgrade of all-three services by higher-end hubbing households and possible dilution of ARPUs, due to M1’s mySIM plans, could lead to investors readjusting their expectations.

Maintain FULLY VALUED with lower Target Price of S$2.20.
We raise WACC to 6.0% from 5.7% previously as we expect higher volatility in the stock to raise the cost of equity. We roll forward our DCF valuation base to FY18F, and assume 0% terminal growth.

Limited uptake of TPG and Circles.Life. Under our bull case scenario for StarHub, we project Circles.Life and TPG to secure mobile revenue share of only 3.5% in 2022 versus our base case projection of 5.5%, leading to a TP of S$2.57 for StarHub.

StarHub's go-to market strategy of bundling mobile, broadband and pay-TV services has come under pressure from the proliferation of OTT TV services.
Nearly 14,000 customers with subscriptions to three or more services have downgraded since 2Q16, representing ~4% of subscriptions with three or more services. Majority of these customers are moving away from Pay-TV to cheaper alternatives such as Netflix, despite losing the discount available on bundled services in the process.
We believe downgrades of hubbing subscriptions would accelerate amid the increasing appeal of OTT TV services among high-end Pay TV customers and rising pressure on the broadband segment from M1 and MyRepublic.

StarHub managed to reverse declines in ARPU, witnessed over the past three quarters, in 2Q17. Postpaid ARPUs improved 4% q-o-q in 2Q17 despite declining 1% on a y-o-y basis. We believe that recent unlimited data plans introduced by Starhub at higher rentals would further buttress ARPU growth over the near term.
However, Starhub’s efforts to lift ARPUs may be undercut by M1’s recently introduced mySIM plans, which offer similar data quotas and lower legacy bundles at over 50% discount to similar SIM-only plans by StarHub. If StarHub decides to match M1’s latest mySIM plans in a bid to prevent M1 poaching StarHub's subscribers, StarHub could witness potential dilution of ARPUs in the near term.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-10-16

DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 2.20 Down 2.330