StarHub Ltd - OCBC Investment 2017-11-03: Enterprise Business Starting To Gain Traction

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STARHUB LTD CC3.SI

StarHub Ltd - Enterprise Business Starting To Gain Traction

• StarHub's 9M17 EBITDA met 84% of our estimate.
• Strong enterprise revenue growth in 3Q17.
• Expects capex for FY17 to decrease.

9M17 above expectations 

• StarHub Ltd’s (StarHub) 3Q17 revenue fell 0.8% YoY to S$580.4m but would have been worse if not for the 11.3% growth in the enterprise fixed business, while operating expenses grew 0.4% YoY at S$481.8m on higher depreciation and amortization. 
• Consequently, 3Q17 EBITDA and PATMI declined 1.7% and 11.5% YoY to S$176.0m and S$76.2m, respectively. For 9M17, revenue fell 0.6% YoY to S$1751.7m, as growth from enterprise fixed (+5.0%) and sales of equipment (+5.8%) were offset by mobile (- 0.8%), pay TV (-7.7%) and broadband (-1.8%).
• 9M17 operating expenses increased 1.0% to S$1447.7m, mainly due to higher cost of equipment sold and higher cost of services but partly offset by lower staff costs and marketing and promotions costs. 
• Consequently, coupled with lower income grant and higher operating expenses, core 9M17 PATMI (excludes one-time S$9.5m gain in 2Q16 and S$0.7m loss in 3Q17 for investment in mm2 Asia), fell 15.2% YoY to S$235.6m. 
• 9M17 EBITDA also declined 6.7% YoY to S$517.0m and met ~84.3% of our estimate. EBITDA margin was 2.0ppt YoY lower at 31.8%.

4Q17 to drag EBITDA margin down on higher subsidies 

• Looking ahead, we expect:
  1. FY17F service revenue to be flat,
  2. EBITDA margin on service revenue to be between 26-28%, and
  3. cash capex to decrease to 13% of total revenue (excluding any spectrum payments) compared to previous guidance of 10%. 
• While 9M17 EBITDA margin was higher at 31.8% relative to its guidance, management guided that they expect higher handset subsidies in 4Q17. 
• Mobile and Pay TV continues to be under pressure from new entrant and alternative viewing platforms, respectively.

Wait for more consistent performance from enterprise segment 

• As we expect weaker 4Q17 results, we opt to keep our forecasts largely unchanged for now despite above expectations 9M17 performance.
• In addition, while enterprise segment seems to be gaining traction as it ramps up on its ICT-related business with a suite of solutions offered, we prefer to wait for consistent performance before reviewing this segment’s ability to offset weakness from the mobile and PayTV segments.
• Hence, maintain SELL with FV of S$2.30.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-11-03

OCBC Investment SGX Stock Analyst Report SELL Maintain SELL 2.300 Same 2.300