Starhub - CIMB Research 2018-03-14: Not Enough To Reach For The Stars

Starhub - CIMB Research 2018-03-14: Not Enough To Reach For The Stars STARHUB LTD CC3.SI

Starhub - Not Enough To Reach For The Stars

  • StarHub’s mobile business is at risk of being negatively impacted from FY19F onwards by the entry of the fourth mobile operator, TPG.
  • Broadband revenue could ease further in FY18F-19F, while pay TV is facing a structural decline. The only bright spot for growth may be fixed network services.
  • Maintain HOLD with an unchanged target price of S$2.70.

At risk from fourth mobile operator but likely lower impact than M1

  • We expect StarHub’s mobile revenue to decline by a mild 0.8% in FY18F, before falling by a steeper 4.9%/6.7% in FY19F/20F due to keener competition post TPG’s entry. 
  • The impact on StarHub is likely to be less severe than on M1 as the mobile business formed only 54% of StarHub’s FY17 service revenue. Its ability to bundle quad-play services also puts it in a stronger position to defend its market share.

Broadband revenue to ease further in FY18F-20F

  • We expect broadband revenue to ease by c.1% p.a. in FY18F-20F (FY17: -1.3%), as the positive effects from subs upgrading to higher speed plans diminish while the subs base is expected to fall further due to intense competition.

Pay TV business facing structural decline

  • With the rise of alternative over-the-top video platforms and increased proliferation of pirated set-top boxes, StarHub’s pay TV revenue (16% of FY17 service revenue) could decline at a 7.6% CAGR during FY17-20F, based on our forecasts.

Fixed network services growth could provide some buffer

  • StarHub’s fixed network services business (20% of FY17 service revenue) is the only bright spot for growth, in our view. We forecast this segment’s revenue to register a 6.7% CAGR in FY18-20F, driven by healthy demand for managed services.

Overall earnings outlook is still down in FY19/20F

  • 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.

What if StarHub makes more acquisitions?

  • Based on its balance sheet, we estimate StarHub may have room to invest in FNS-related acquisitions up to a further c.S$300m. Assuming an acquisition P/E of 10x, it could buy companies that generate up to an aggregate S$30m in net profit. After interest costs (3-4%) to fund such acquisitions, net profit accretion would be c.S$20m.
  • However, despite its intentions, there is no guarantee that StarHub can find more good companies to acquire at a reasonable price.

What if mobile competition is better or worse than expected?

  • In our base case, we have assumed a cumulative 10% impact on StarHub’s mobile ARPU in FY19-20F from TPG’s market entry. 
  • In the bull case, if the cumulative impact is only 5%, then its EBITDA/net profit will decrease by a lower 0.2%/11.2% in FY17- 20F. 
  • In the bear case, if mobile ARPU is impacted by a cumulative 15%, EBITDA/net profit will drop by a more substantial 15.7%/42.5% over the same period.

Maintain HOLD with an unchanged target price of S$2.70

  • Maintain HOLD with an unchanged DCF-based target price of S$2.70 (WACC: 7.1%).
  • StarHub’s 13.8x FY18F EV/OpFCF is at a 17% discount to ASEAN telcos. 
  • 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 | 2018-03-14
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.700 Same 2.700