StarHub (STH SP) - Maybank Kim Eng 2018-02-15: Into The Woods

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STARHUB LTD CC3.SI

StarHub (STH SP) - Into The Woods

Challenges remain 

• Following 4Q17 results, we revised estimates with 2018E/19E/20E core profit +28%/-4%/-12% and EBITDA +11%/-5%/-10% on the back of:
  1. weaker revenue outlook due to wireless sector competition;
  2. lower handset subsidies as the battle shifts to tariffs instead; and
  3. lower capex to sales assumptions. 
• We raised 2018E mainly on lower subsidies.
• We reiterate SELL but raised Target Price 5% to SGD2.27 mainly on lower capex assumptions, which still offers 21% downside. 
• We also believe competition is set to intensify in the wireless space.

4Q17 and FY17 profit were below consensus 

• StarHub's 4Q17 revenue at SGD649m (+12% q-o-q; +2% y-o-y) was -2%/+4% vs MKE/FactSet consensus with wireless and pay TV coming under pressure but salvaged by the fixed/enterprise segment. 
• 4Q17 EBITDA at SGD97m (-45% q-o-q; -29% y-o-y) was +22%/-17% vs MKE/consensus. Handset subsidies were lower than our estimate but elevated cost of services and exceptional staff retention and provisions on pay TV contracts were a drag on the quarter. 4Q17 core profit at SGD23m (-70% q-o-q; -57% y-o-y) was consequently +152%/-47% vs MKE/consensus. 
• On a full-year basis core profit was +6%/-7%.

Mixed guidance 

• Despite the impact from recent acquisitions in the enterprise segment, management guidance on 2018 service revenues were a decline of 1-3%, while EBITDA margin on current accounting standards would range from 24-26%. 
• Capex to sales guidance of only 11% was a positive surprise and we have cut our prior capex forecasts of c15% accordingly. This year’s DPS commitment was kept at SGD0.16.

Raising our Target Price but maintain SELL 

• We have cut our 2018/19/20E revenues by 1%/1%/2% to reflect likely tariff competition rather than subsidy based competition from new entrants. It is also to reflect the increased popularity of lower ARPU-SIM-only plans. 
• Our Target Price is based on a DCF valuation with unchanged WACC of 5.3 and long-term growth -1%. We maintain our SELL. 
• A hasty retreat by new entrants and/or stronger enterprise growth is the risk to our negative stance.

Swing Factors

Upside

• Enterprise segment targeting, including government contracts revolving around the Smart Nation initiatives provides source of new revenues, despite competition with SingTel.
• Network alliance with M1 to reduce network redundancies and operating expenses, and future joint capex planning is under negotiation.

Downside

• Re-contracting/retention costs likely to rise on the back of new smartphone launches and defensive preparation against TPG’s entry.
• Further wireless tariff package pressure on rates and/or data allocations possible with new competition.
• Further investments in enterprise or content space that may have a gestation period before realizing returns.

Luis Hilado Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-15

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 2.27 Up 2.170