StarHub (STH SP) - UOB Kay Hian 2017-11-03: 3Q17 Reliant On Fixed Enterprise Business For Future Growth

StarHub (STH SP) - UOB Kay Hian 2017-11-03: 3Q17 Reliant On Fixed Enterprise Business For Future Growth STARHUB LTD CC3.SI

StarHub (STH SP) - 3Q17 Reliant On Fixed Enterprise Business For Future Growth

  • StarHub's revenue has declined on a yoy basis for the mobile, pay-TV and residential broadband businesses. Fixed enterprise was the only source of growth with revenue from Data & Internet expanding 13.2% yoy. 
  • Management has lowered guidance for capex from 13% to 10% of total revenue for 2017. 
  • Maintain HOLD. Target: S$2.62. Entry price: S$2.38.



RESULTS

  • StarHub reported net profit of S$76.2m for 3Q17, in line with our forecast of S$77.3m.

Mobile: Cleans up post-paid subscriber base. 

  • StarHub’s post-paid subscriber base contracted by 1.7% qoq to 1,362,000 due to one-time termination of 23,000 inactive legacy data-only lines. Post-paid ARPU was stable at S$69. We estimate that post-paid mobile revenue grew by a marginal 0.7% yoy. StarHub lost 10,000 pre-paid subscribers and pre-paid ARPU dropped 12.5% yoy to S$14 due to lower usage for voice and iDD.
  • We estimate that pre-paid mobile revenue contracted 10.9% yoy.

Pay-TV: Secular decline in viewership. 

  • StarHub lost another 10,000 pay-TV subscribers this quarter. This is the ninth consecutive quarter of contraction for its pay-TV subscriber base caused by piracy and competition from alternative viewing options. PayTV ARPU was kept stable at S$51. Pay-TV revenue dropped 8.4% yoy, commensurate with the contraction of its pay-TV subscriber base.

Residential Broadband: Losing its edge. 

  • StarHub’s broadband subscriber base contracted 1,000 qoq and 9,000 yoy. Broadband ARPU was stable at S$37 aided by migration to fibre broadband. Broadband revenue dropped 2.7% yoy due to the 1.9% yoy contraction in subscriber base.

Enterprise Fixed: Main engine for growth. 

  • Revenue from Data & Internet grew 13.2% yoy to S$96.9m while revenue from Voice was stable at S$12.6m. Fixed Enterprise is the second largest source of revenue after Mobile.

Earnings hit by higher depreciation & amortisation. 

  • Handset subsidies declined 12.1% yoy to S$50.8m as customers awaited the blockbuster launch of new smartphones from Apple. Thus, EBITDA margin was stable at 32.3%. Depreciation & amortisation increased substantially by 12.2% yoy to S$74.5m.


STOCK IMPACT


Lowered guidance for capex. 

  • Management guided that service revenue for 2017 would be similar to 2016’s. EBITDA margin is expected to narrow to 26-28% (2016: 31.2%) due to higher costs for customer acquisitions (handset subsidies), less adoption grants from NGNBN and negative impact of stronger US$ on payments for smartphones and content. While the amount of subsidy for iPhone X is similar to previous generation of smartphones, the volume for iPhone X is expected to be substantial in 4Q17.
  • Management has lowered its guidance for capex from 13% to 10% of total revenue (exclude spectrum payments) due to the securement of better terms from equipment vendors and timing of commissioning for certain projects.

Growth from Fixed Enterprise. 

  • StarHub has invested in new capabilities to provide a wider array of systems and solutions. It focuses on managed services for large enterprises and government agencies, which is more sustainable and provides continuity for growth. It also provides datacentres, analytics and cyber security. 
  • Management disclosed that newly-acquired Accel Systems & Technologies contributed revenue of S$7m, which is one-third of the growth for Data & Internet business in 9M17.

Secured contract for cyber security. 

  • In Sep 17, StarHub was among six firms to be awarded a 3-year contract worth S$50m to ensure that government’s websites are fully available to the public even during a cyberattack.

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 will be rolled out at more OCBC branches and StarHub outlets over time.


EARNINGS REVISION/RISK

  • We raise our earnings forecast for 2017 by 2.1% due to the lower guidance for capex.


VALUATION/RECOMMENDATION

  • Maintain HOLD. 
  • Our target price of S$2.62 is based on DCF (COE: 6.5%, and terminal growth: 1.5%). Entry price: S$2.38.


SHARE PRICE CATALYST

  • Attractive dividend yield of 6.1%.
  • Erosion of pay-TV and residential broadband businesses.
  • Risk from entry of TPG Telecom as the fourth mobile operator.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-03
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.620 Same 2.620



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