StarHub (STH SP) - Maybank Kim Eng 2018-04-02: Now In A HOLDing Pattern

STARHUB LTD CC3.SI

StarHub (STH SP) - Now In A HOLDing Pattern

With the StarHub de-rating close to levels we envisage in our base case scenario of gradual erosion in incumbents’ revenues, we upgrade to a HOLD. However, it is still too early to be positive on the sector with new MVNOs and TPG set to launch in 2H18, and neither can we write off the worst case scenario risk we painted in our 13 March 2018 Sector Note: Singapore Telcos - TPG Scenarios ~ The Base, The Blue Skies & The Ugly.

Following TPG’s teaser announcement on 19 March 2018 offering free SIMs, unlimited voice and 3GB/month data for senior citizens for 24 months, the Singapore focused StarHub share price has de-rated by 5% and has underperformed the STI by 26% on a 12-month basis.
Regardless of the fact that TPG’s segment is niche and that the full mechanics have not yet been revealed, we believe the market took it as a sign that TPG intends to put up a fight for share. By playing the good corporate citizen card, not only did TPG create public goodwill but we believe it also helps it to negotiate building and housing access for its nationwide coverage rollout by end-2018.

Per our base case scenario for the industry that TPG (TPM AU, Not Rated) and the various MVNOs attain a less than 10% industry wireless revenue share by 2019E, we think StarHub is not yet at particularly compelling value levels yet.
We do note that cash dividend yields even in the 2019E pressure point may pique interest at 7% levels but sustainability may be questioned depending on the competitive situation that emerges.

Although TPG’s stated purpose at the onset was for only 5-6% market share, we cannot discount our worst case scenario that tariff wars ensue and a more aggressive market share grab takes place. Incumbents attempting to stay out and let MVNOs compete with TPG for a lower income segment is ideal but contamination is always possible.
Our sensitivity analysis shows that every 1% change in wireless revenue would impact StarHub’s 2019E core profits and TPs by 2%.

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.

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/ 2018-04-02

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