Starhub - CIMB Research 2018-02-15: 4Q17 Earnings Missed; Grim FY18 Guidance

Starhub - CIMB Research 2018-02-15: 4Q17 Earnings Missed; Grim FY18 Guidance STARHUB LTD CC3.SI

Starhub - 4Q17 Earnings Missed; Grim FY18 Guidance

  • StarHub's FY17 core EPS below expectations. StarHub issued bleak FY18 guidance with 1-3% fall in revenue and 2-4% pts drop in EBITDA margin, though DPS is kept at S$0.16.
  • Challenging quarter for mobile & pay TV but Fixed Enterprise revenue soared.
  • EBITDA margin fell by 2.2% pts y-o-y on higher device subsidies and cost of services.
  • FY18-19F core EPS cut by 12.0-15.5% (EBITDA by 7.5-8.3%).
  • Maintain HOLD with a 4% lower target price of S$2.70.

4Q17: below; bleak FY18 EBITDA margin and revenue guidance 

  • Normalised 4Q17 EBITDA dipped 9.9% y-o-y (-38.5% q-o-q) on lower National Broadband Network (NBN) grants and higher opex. Core EPS fell by a steeper 43.0% y-o-y (-69.5% qoq), on higher depreciation. 
  • FY17 core EPS missed expectations at 15%/11% below our/Bloomberg consensus forecasts. Key variance is higher-than-expected opex. 
  • 4Q17 DPS was S$0.04 (FY17: S$0.16). For FY18, StarHub guided for a 1-3% fall in service revenue, a 2-4% pts drop in EBITDA margin but maintained its DPS at S$0.16.

Mobile revenue rebounds q-o-q, driven by prepaid 

  • Mobile service revenue fell 3.5% y-o-y in 4Q17 due to SIM-only dilution and lower voice/roaming/IDD usage. Mobile revenue rose 1.3% q-o-q. Prepaid subs grew 4.8% on steady ARPU. Postpaid subs also rose (+0.4%) but ARPU fell 1.4% q-o-q. Postpaid subs that exceeded their data bundles eased q-o-q to 35% (3Q17: 38%, 4Q16: 30%) after it introduced unlimited weekend data, which lowered excess data usage revenues.

Another challenging quarter for pay TV; broadband stabilises 

  • StarHub’s pay TV revenue fell 7.5% y-o-y (+1.4% q-o-q). Subs fell for the tenth quarter in a row, down 1.9% q-o-q to 458k, impacted by piracy and alternative over-the-top viewing platforms. After four steady quarters, ARPU dipped 2% q-o-q (-2% y-o-y) to S$50. 
  • 4Q17 broadband revenue was flat y-o-y, but rose 1.9% q-o-q for the second successive quarter. ARPU was steady both q-o-q and y-o-y at S$37, while subs recovered 1k q-o-q (+0.2%).

Fixed Enterprise revenue soars 

  • Fixed Enterprise revenue growth soared 20.9% y-o-y (+18.5% q-o-q) due to higher revenue from managed services, analytics, network and cybersecurity contract wins, and partly due to its acquisition of Accel Systems & Technologies at end-May 17.

Weaker EBITDA margins y-o-y 

  • Normalised EBITDA margin on service revenue eased 2.2% pts y-o-y (-13.3% pts q-o-q) to 18.9%. This was mainly due to higher device subsidies, cost of services (increase in NBN fibre lease payment, Fixed Enterprise service cost) and operating lease.

FY18-19F core EPS cut by 12-15% 

  • We cut FY18-19F core EPS by 12.0-15.5% (EBITDA: 7.5-8.3%) to factor in lower mobile service revenue and EBITDA margin. We forecast core EPS to inch up 1.2% in FY18F and fall 11.5%/18.6% in FY19/20F. 
  • While we see healthy Fixed Enterprise revenue growth, it may be unable to fully offset declining mobile revenues as competition intensifies with TPG’s entry and weaker pay TV and broadband businesses. 
  • We maintain FY18-20F DPS at S$0.16, as net debt/EBITDA could remain below 2x over the period.

Maintain HOLD with a 4% lower target price of S$2.70 

  • Maintain HOLD with a 4% lower DCF-based Target Price of S$2.70 (WACC: 7.1%) due to our EBITDA cuts, but partly offset by a more optimistic long-term forecast for Fixed Enterprise revenue after its strong performance in 4Q17 and lower net debt at end-FY17.
  • Its 15.8x FY18F EV/OpFCF is in line with the ASEAN telco average. A good entry point is below S$2.40 (bear case) and exit point above S$3.00 (bull case). 
  • Key upside/downside risks are lower-/higher-than-expected impact from TPG’s entry.

FOONG Choong Chen CFA CIMB Research | 2018-02-15
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.70 Down 2.800