StarHub - RHB Invest 2018-02-15: Falling Short, Margin Hits New Low

StarHub - RHB Invest 2018-02-15: Falling Short, Margin Hits New Low STARHUB LTD CC3.SI

StarHub - Falling Short, Margin Hits New Low

  • StarHub’s results fell short of consensus/our estimates due to higher-than-expected cost and the steep margin slippage sequentially. The stronger growth in the enterprise segment was not sufficient to offset the decline in mobile, pay-TV and broadband revenues in FY17. 
  • Moving forward, we expect the enterprise segment to remain the key growth driver and catalyst, with StarHub looking to offer more holistic managed solutions/services across verticals. 
  • We cut FY18F-20F core earnings by 12-14% post the results call. Maintain NEUTRAL, with our DCF-derived Target Price (WACC: 7.2%, TG: 1.5%) lowered slightly to SGD2.65 (from SGD2.70, 7% downside) after rolling forward our base year. 
  • StarHub trades at -1SD of its five-year EV/EBITDA mean, which we consider as fair given the concerns over heightened competitive risks in the market. We prefer Singtel for exposure due to its more diversified operations.



Hit by provisions and one-offs. 

  • StarHub's 4Q17 core earnings fell a sharp 70% q-o-q to a new low, due to the 15ppts sequential decline in EBITDA margin. This came from a spike in handset cost (seasonal), accelerated content cost amortisation and higher fibre migration cost. FY17 core earnings of SGD247m underwhelmed expectations, making up 84% of our estimate and 89% of consensus earnings.
  • On a y-o-y basis, FY17 core earnings (-19%) were hit by weaker EBITDA, increased depreciation and higher effective tax rate. 
  • An expected SGD0.04 per share DPS brings YTD DPS to SGD0.16 per share, reflecting a yield of 4.2%.


Lumpy one-offs in 4Q17. 

  • Higher provisions for staff cost (SGD20m) and one-off leasing cost (SGD8m) in 4Q17 contributed to the sharp 82% q-o-q fall in headline earnings.


Enterprise continues to ramp up strongly. 

  • Enterprise revenue growth accelerated to 18.5% q-o-q (+21% y-o-y/FY17: +9%) from 10.3% in 3Q17, driven by stronger growth in managed services, analytics, cyber-security project wins and contribution from Accel Systems and Technologies (ASTL), which was acquired last July. These offset the extended decline in usage revenue. 
  • We expect the enterprise segment to remain the key growth driver going forward, with StarHub looking to offer more holistic managed solutions/services across industry verticals and to drive recurring earnings. 
  • During the results call, management indicated the government, banking and retail/hospitality sectors as the key verticals and does not rule out more M&As to further strengthen its enterprise capabilities.


MSR up q-o-q on seasonality but pay-TV and broadband services still lacklustre. 

  • MSR up q-o-q on seasonality but pay-TV and broadband services still lacklustre. Mobile service revenue (MSR) gained 1.3% QoQ (behind M1 (M1 SP, NEUTRAL, TP: SGD1.95)’s +2.8% q-o-q) on 2% subs growth. 
  • Postpaid ARPU continues to be diluted by the stronger take-up of SIM-only plans (guided at < 10% of overall base), down for the second consecutive quarter to SGD68. Average data usage per subs has widened to 4.6GB/month in 4Q17 from 4.5GB/month in 3Q17 (4Q16: 3.7GB/month). 
  • Meanwhile, Pay-TV revenue continues to be weak – due to piracy and cannibalisation from over-the-top and direct streaming platforms – while the broadband segment looks to have stabilised q-o-q. 

FY18 guidance. 

  • Management has guided for service revenue growth to decline by 1-3% in FY18 on EBITDA margin (based on service revenue) of 24-26% (before Singapore Financial Reporting Standard 15 (SFRS 15 adoption). 
  • EBITDA margin is expected to rise by 4-6% after SFRS 15 adoption, as handset sales would be classified under device sales. 
  • Capex is guided at 11% of total revenue (excluding spectrum). 
  • The new accounting policy is neutral on cashflow.


Maintain NEUTRAL, Target Price reduced slightly. 

  • We cut FY18F-20F core earnings by 12-14% post the results call. Our DCF-derived Target Price is lowered to SGD2.65 after rolling forward our forecast base year. 
  • StarHub trades at -1SD of its five year EV/EBITDA mean, which we consider fair, given the concerns over competitive risks in the market. Its prospective dividend yields of over 4% are decent and should offer some downside support. 
  • Key risks to our forecasts are stronger-than expected competition and higher-than-expected capex. 




Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-15
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.65 Down 2.700



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