StarHub (STH SP) - DBS Research 2017-11-03: Enterprise Growth Offsets Weakness Elsewhere, Capex Lowered

StarHub (STH SP) - DBS Vickers 2017-11-03: Enterprise Growth Offsets Weakness Elsewhere, Capex Lowered STARHUB LTD CC3.SI

StarHub (STH SP) - Enterprise Growth Offsets Weakness Elsewhere, Capex Lowered

  • StarHub's 3Q17 net profit of S$76.5m (-11% y-o-y, -11% q-o-q) was in line with our expectations.
  • Enterprise business offsets weakness of the pay TV segment; FY17F capex lowered to 10% of revenue from 13% earlier. 
  • We are concerned about Circles.Life chipping away revenue share in the mobile segment. Maintain FULLY VALUED on StarHub with unchanged TP of S$2.20. 

What’s New 

Enterprise revenue growth offsets weakness elsewhere.

  • StarHub's 3Q17 revenue of S$580.4m (-1% y-o-y, flat q-o-q) was in line with our expectations. 
  • Fixed services which include Enterprise business grew to S$109.5m (+11% y-o-y, +10% q-o-q) with ~S$5m contribution from Cyber Security firm Accel Systems acquired in May 2017. 
  • Pay TV revenue declined to S$85.7m (-8% y-o-y, -3% q-o-q) due to contraction of subscriber base while broadband revenue of S$53.1m (-3% y-o-y, +1% q-o-q) was stable as more customers switched to lower-margin fibre broadband service.
  • Mobile revenue of S$297m (-1% y-o-y, -2% q-o-q) continued to see gradual erosion due to declining voice and roaming revenue. 
  • On a positive note, StarHub lowered its capex (excluding spectrum payment of S$69m) to revenue guidance for FY17 to 10% from 13% earlier due to better terms from vendors and timing of projects.

3Q17 net profit of S$76.5m (-11% y-o-y, -11% q-o-q) was in line with our expectations. 

  • Margins were impacted by cost increases relating to fibre broadband, managed service cost and rising depreciation.

We are concerned about the impact of Circles.Life on the mobile sector. 

  • Singtel & StarHub tried to stabilise the postpaid ARPU in August-September 2017 by offering more bundled data with upward revision in package pricing. However, M1’s handset-based MySIM* plans launched in October offer more bundled data at a lower package price.
  • This effectively reduces package pricing by 16-22% versus its older plans in our estimates and could help M1 to garner revenue share, if Singtel and StarHub do not react. 
  • We believe that M1, being the network provider of Circles.Life, is painfully aware of the ~1% market share gained by Circles.Life by virtue of its digital business model and cheaper data pricing. While the market is concerned about TPG’s entry in late 2018, Circles.Life is quietly chipping away market share under the radar.

StarHub is expensive despite a decent dividend yield. 

  • The decline in the number of households subscribing to all three services – pay TV, fixed broadband and mobile – 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), the company's annual DPS could be cut to 14 Scts in FY19F to stay below 2.0x net debt to EBITDA. 
  • As margin pressure is likely to continue, we maintain our FULLY VALUED rating on the counter with an unchanged DCF-based (WACC 6.0%, terminal growth 0%) TP of S$2.20

Sachin MITTAL DBS Vickers | 2017-11-03
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 2.200 Same 2.200