StarHub (STH SP) - UOB Kay Hian 2017-10-12: Bulking Up With Broader Capabilities

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STARHUB LTD CC3.SI

StarHub (STH SP) - Bulking Up With Broader Capabilities

• StarHub has strengthened its post-paid mobile plans with unlimited data over weekends. iPhone X would be available on 3 November but would result in higher handset subsidies in 4Q17 and 1Q18. 
• The revamped leadership and acquisition of Accel Systems & Technologies would strengthen growth at the Fixed Enterprise Group. 
• Maintain HOLD. Target price: S$2.62. Entry price: S$2.38.

WHAT’S NEW

Rewarding customers with unlimited data over weekends. 

• StarHub has responded to the entry of a fourth mobile operator through the launch of new value-added services, such as DataJump (previously Data Upsize) and DataShare. It has revamped its post-paid mobile packages with unlimited weekend data plans, which are priced S$5.10 higher compared to previous packages. 
• However, the uplift in ARPU would be negated by continuous erosion in contributions from international roaming.

Unlikely to cause network congestion. 

• The population is more evenly spread out across the island during weekends, unlike the congregation of office workers in the central business district (CBD) during weekdays. Customers are usually at home and have access to WiFi. 
• Customers are also unlikely to change their lifestyle or increase data usage in response to unlimited data over the weekends.

Curse of higher handset subsidies from iPhone X. 

• The response to iPhone 8 and 8 Plus has been lukewarm because many customers are waiting for iPhone X, which will be available on 3 November. The retail price for iPhone X is S$1,648 (64MB) and S$1,888 (256MB). 
• The hefty price tag would result in higher handset subsidies. Customers would also be forced to upgrade to higher-tier plans to reduce the upfront payment for handsets.
• EBITDA margin was 31.6% in 1H17 but management has guided lower EBITDA margin of 26-28% for 2017.

An uphill task for TPG to juggle challenges in Singapore and Australia. 

• TPG could struggle to attract a following in Singapore.
  1. TPG is a budget and no-frills brand while Singaporeans are accustomed to high quality coverage and ultra-fast download speed.
  2. About 90% of Singaporeans use branded smartphones from Apple and Samsung and prefer paying for their smartphones by instalments over a 2-year contract.
  3. About 80% of StarHub’s post-paid subscribers are locked up in existing contracts and could not switch over to TPG immediately.
  4. It has to negotiate international roaming agreements with foreign telcos over time.
  5. It does not have access to common antenna systems (CAS) set up by incumbent telcos in commercial buildings (retail malls and office towers).

Partnership with OCBC. 

• StarHub and OCBC have entered into a multi-year partnership to bring together businesses across various industries. 
• The two companies will invest S$6m in research and technology over the next 12 months. They will leverage on data insights to understand customers’ needs and deliver relevant solutions to their combined base of 5m customers. 
• The two companies showcased their first store-in-store at OCBC’s Orchard Gateway branch that offers OCBC’s financial services and StarHub’s info-communications and entertainment services. The concept would be rolled out at more OCBC branches and StarHub outlets over time.

Secured contract for cyber security. 

• StarHub was among six firms to be awarded a S$50m contract to ensure that government’s websites are fully available to the public even during a cyberattack.

STOCK IMPACT

Bulking up with broader capabilities. 

• StarHub has strengthened its defence in the mobile space. It has also revamped the leadership and added system integration and cyber security capabilities through the acquisition of Accel Systems & Technologies. 
• It has increased investments in its own fibre optics network to strengthen growth for Fixed Enterprise.

EARNINGS REVISION/RISK

• We maintain our earnings forecasts.

VALUATION/RECOMMENDATION

Maintain HOLD. 

• Our target price of S$2.62 is based on DCF (COE: 6.5%, terminal growth: 1.5%), assuming M1 and StarHub embark on network sharing. 
• However, our target price would drop to S$2.20 if the network sharing with M1 fails to materialise.

SHARE PRICE CATALYST

• StarHub’s dividend yield has improved to 6.1% after the recent steep correction.
• Savings in capex from sharing of mobile infrastructure with M1.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-12

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.620 Same 2.620