StarHub (STH SP) - UOB Kay Hian 2018-04-10: Adopting SFRS (I) 15

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STARHUB LTD CC3.SI

StarHub (STH SP) - Adopting SFRS (I) 15

• StarHub has adopted SFRS (I) 15 effective 1 Jan 18, which increases equipment revenue but reduces subscription revenue. The seasonal fluctuation in EBITDA margin is reduced but accompanied by a significant drop in ARPUs for mobile and broadband. 
• While the timing of payment has not been determined, StarHub is expected to incur a one-time tax payable estimated at S$50m on adjustment to opening retained earnings for 2018. Management will provide more guidance when StarHub announces its 1Q18 results. 
• Maintain SELL. Target price: S$2.25.

WHAT’S NEW

• SFRS (I) 15 is a new financial reporting standard on accounting for revenue from contracts with customers. It affects the manner in which revenue is recognised for services provided together with equipment, such as handsets and routers, and bundling of multiple services. StarHub has adopted SFRS (I) 15 effective 1 Jan 18.

SFRS (I) 15 specifies rules on how revenue is allocated. 

• Revenue recognition is based on value received by customers at each point in time (obligation is performed) based on standalone selling price (SSP). 
• SSP could be determined based on three methodologies, namely:
  1. adjusted market prices,
  2. cost plus margin, or
  3. residual approaches.

SFRS (I) 15 would have the following impact: 

1. Handset revenue increases.
   • In the past, revenue from the sale of a handset was based on the subsidised price of the handset. With IFRS (I) 15, SSP for handsets is based on market prices observed in the retail market, such as Apple Store and Best Denki. StarHub would record a small profit at the onset of the usual 24-month postpaid mobile contracts.
   • In the past, StarHub’s EBITDA margin would compress in 4Q when it experiences the highest volume of sign-ups or re-contracting. This seasonal fluctuation in EBITDA margin would be moderated. On the contrary, absolute EBITDA would increase in 4Q as EBITDA margin for handsets is lower but positive.
2. Subscription revenue decreases.
   • For mobile services, the transaction price allocated to subscription revenue becomes smaller because a larger amount is allocated to the sale of a handset. Thus, post-paid mobile ARPU would be lower based on IFRS (I) 15. Pre-paid mobile ARPU would remain largely unchanged.
   • For residential broadband services, a larger portion of the transaction price will be allocated for sale of routers and a smaller portion allocated to subscription revenue. Thus, broadband ARPU would also decline.
   • However, pay TV ARPU would be less affected. EBITDA/service revenue would increase as service revenue becomes smaller.
3. Implication on taxes.
   • The full retrospective approach is applied for active contracts in 2017 and the profit and loss statement for 2017 would be restated. The opening retained earnings for 2018 would be adjusted higher to reflect revenue from sale of handsets that was supposed to be recognised in prior years. 
   • The potential cash tax payable estimated at S$50m, including timing for payment, is still being discussed with IRAS. 
   • There is no impact on cash flow except for the one-time tax payable on adjustment to opening retained earnings.

STOCK IMPACT

Fixed Enterprise the only engine of growth. 

• StarHub has made good progress in its fixed enterprise business. It has acquired Accel Systems & Technologies to beef up capabilities in cyber security and system integration. Revenue from fixed enterprise (data & Internet) grew 25.4% y-o-y in 4Q17.

EARNINGS REVISION/RISK

• We keep our existing earnings forecasts. 
• Management will provide more information and guidance on impact of SFRS (I) 15 when StarHub announces its 1Q18 results in early May.

VALUATION/RECOMMENDATION

Maintain SELL. 

• We maintain our defensive stance on the telco sector as we brace ourselves for the impending entry of TPG as the 4th mobile operator. 
• StarHub’s share price could experience volatility ahead of the commercial launch by TPG Telecom due to their reliance on the Singapore market. The mobile business in Singapore accounted for a significant 52.6% of its service revenue in 4Q17.

SHARE PRICE CATALYST

• Dividend yield is attractive at 7% for 2018 but could drop to 5.3% in 2019.
• Erosion for 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/ 2018-04-10

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