StarHub Ltd - OCBC Investment 2018-04-10: Near-term Support From Yield

StarHub Ltd - OCBC Investment 2018-04-10: Near-term Support From Yield STARHUB LTD CC3.SI

StarHub Ltd - Near-term Support From Yield

  • New revenue recognition standard.
  • Higher EBITDA margin under new standard.
  • Unchanged Fair Value of S$2.20.

To adopt new accounting standard effective 1 Jan 18 

  • StarHub Ltd (StarHub) will be adopting the new revenue recognition standard SFRS(I) 15 effective from 1 Jan 18, with full retrospective approach for active contracts from Jan 17. The mobile business will be the most impacted by this change in accounting standard. 
  • Based on the existing standard, Starhub has been recording revenue that closely mirrors billing to customer and cash receipt. As the majority of Starhub’s revenue are based on 24-month contracts with equipment subsidy provided to customer, Starhub currently recognizes an upfront loss from the sale of subsidized equipment at the point of contract while recovering the cost of equipment over the next 24 months through the monthly subscription fee (i.e. the equipment subsidy provided is embedded in the monthly subscription pricing). In short, Starhub currently records upfront the handset cost but not the revenue. 

Impact mostly on P&L statement 

  • Under the new standard, Starhub will record revenue based on the value received by customer at each point in time. For example, at the time of entering a 24-month contract with a customer bundled with a subsidized equipment purchase, Starhub will recognize a profit or loss on the sale of the equipment based on the standalone selling price of the phone (i.e. adjusted market price) less cost of equipment.
  • This means Starhub will now recognize both the revenue and cost of equipment upfront. Starhub will then strip out the equipment revenue from the monthly subscription price (average revenue per user or ARPU) and record the remainder as monthly revenue over the next 24 months. 
  • In essence, with equipment sales revenue now recognized upfront and service revenue lower since the equipment revenue is stripped out from the monthly subscription – the group is expected to see higher EBITDA margins.

Decent 7% forward yield as at 9 Apr 18 

  • This change in accounting standard will not have any recurring cash flow impact but may result in potential cash tax payable on adjustment to FY18 opening retained earnings (pending discussion with IRAS). 
  • All said, having corrected ~20% YTD (9 Apr 18 close), we believe Starhub’s share price in the near-term will be supported by a decent 7.0% forward yield. Hence, we upgrade Starhub to HOLD with an unchanged Fair Value Estimate of S$2.20.

Eugune Chua OCBC Investment | http://www.iocbc.com/ 2018-04-10
OCBC Investment SGX Stock Analyst Report HOLD Upgrade SELL 2.20 Same 2.200