StarHub (STH SP) - UOB Kay Hian 2018-02-15: 4Q17 When It Rains, It Pours

StarHub (STH SP) - UOB Kay Hian 2018-02-15: 4Q17 When It Rains, It Pours STARHUB LTD CC3.SI

StarHub (STH SP) - 4Q17 When It Rains, It Pours

  • StarHub continued to face mounting pressure on its mobile and pay-TV businesses with revenue from the two businesses contracting 3.5% and 7.5% y-o-y respectively.
  • EBITDA margin contracted 7ppt y-o-y to 16.9% due to hefty handset subsidies and one-off provisions. Management guided contraction in revenue of 1-3%, as these secular headwinds persist into 2018. 
  • Maintain HOLD. Target price: S$2.70. Entry price: S$2.50.



RESULTS

  • StarHub reported net profit of S$14.1m for 4Q17, way below our forecast of S$47.1m.

Mobile: Dip in ARPU and revenue contribution. 

  • StarHub added 6,000 post-paid subscribers q-o-q in 4Q17. However, post-paid subscriber base contracted by 1.4% y-o-y due to one-time termination of 23,000 inactive legacy data-only lines that occurred in 3Q17. 
  • Post-paid ARPU declined 3% y-o-y to S$68 due to shift towards SIM-only plans and lower contribution from voice and roaming. Data usage per data user increased 31% y-o-y to 4.5GB. Thus, post-paid mobile revenue contracted 3.2% y-o-y.

Pay TV: In secular decline. 

  • StarHub lost another 9,000 pay-TV subscribers this quarter. This is the tenth consecutive quarter of contraction for its pay-TV subscriber base caused by piracy in the form of illegal set-top boxes and online video streaming. 
  • Pay-TV ARPU edges lower by S$1 q-o-q to S$50. Pay-TV revenue dropped 7.5% y-o-y, commensurate with the contraction of its pay-TV subscriber base.

Residential Broadband: Losing the edge. 

  • StarHub gained a paltry 1,000 broadband subscribers q-o-q but ARPU was stable at S$37.

Enterprise Fixed: The main engine for growth. 

  • Revenue from Data & Internet grew 25.4% y-o-y to S$117.9m, driven by organic growth from managed services, data analytics and cyber security and contribution from newly acquired Accel Systems & Technologies.
  • Fixed Enterprise is the second largest source of revenue after Mobile.

Earnings hit by handset subsidies and one-off provisions. 

  • We estimated that handset subsidies increased 7.8% y-o-y to S$98.5m due to the launch of premium smartphones, such as iPhone 8 and iPhone X. 
  • StarHub also incurred one-time provisions of S$20m for staff benefits to rationalise and retain talents, and S$8m for leasing contract related to its cable network. Thus, EBITDA margin contracted 7ppt y-o-y to 16.9%.


STOCK IMPACT


Lacklustre guidance for 2018. 

  • Management guided that service revenue would be 1-3% lower for 2018. EBITDA margin on service revenue is expected to narrow to 24-26% due to competition for mobile, pay-TV and broadband businesses and higher handset subsidies, compared with 27.9% for 2017. 
  • Management has lowered its guidance for capex from 13% to about 10% of total revenue (excluding spectrum payments). 
  • StarHub intends to maintain dividend at 4 S cents per quarter for 2018.
  • StarHub continues to beef up capabilities in fixed enterprise business.

Acquisition of D’Crypt. 

  • Starhub entered into an agreement to acquire D’Crypt for up to S$122m. The acquisition will enhance Starhub’s solutioning capabilities in areas such as cryptographic and digital security, secure info-communications technologies (ICT) and internet of things (IoT). It has established strengths in high security applications, such as Encrypted Communications, Secure IoT and Vulnerability and Threat analysis. 
  • D’Crypt has implemented toll system and wireless encryption payment solutions for Electronic Road Pricing (ERP) In-Vehicle Units. The acquisition will be funded by internal cash resources. It will be conducted in two phases: acquisition of 65% stake in Phase 1 (Jan 18) and 35% in Phase 2 (1H21).

To launch blockchain-based digital trade platform. 

  • StarHub has partnered Prudential to launch Fasttrack Trade (FTT) – Singapore’s first digital trade platform for SMEs using blockchain technology. The platform allows SMEs to seek business partners and distributors, buy and sell goods, track shipments, receive and make payments, access financing and buy insurance. 
  • The platform is being developed by fintech start-up Cities Gestion with funding from Prudential. The platform also provides alternative financing options to SMEs through Funding Societies, a peer-to-peer lender. Fasttrack Trade is expected to commercially launch in 1Q18.

Intensified collaboration with M1. 

  • StarHub and M1 have extended their collaboration from sharing in-building distributed antenna systems to sharing of outdoor antenna systems for massive MIMO. 
  • Talks on network sharing with M1 are still on-going.

In search of new CEO. 

  • CEO Tan Tong Hai will step down as CEO and Executive Director on 1 May 18. StarHub is conducting a global executive search for its new CEO.


EARNINGS REVISION/RISK

  • We cut our earnings forecast for 2018 by 12% and for 2019 by 10% due to competitive pressures on its mobile, pay-TV and broadband businesses, despite the lowered guidance on capex.


VALUATION/RECOMMENDATION

  • Maintain HOLD. 
  • Our target price of S$2.70 is based on DCF (COE: 6.0%, and terminal growth: 1.5%). Entry price: S$2.50.


SHARE PRICE CATALYST

  • Attractive dividend yield of 5.6%.
  • 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/ 2018-02-15
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.70 Up 2.620



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