Starhub - CGS-CIMB 2018-05-04: 1Q18 Mobile Service Revenue Missed

Starhub - CGS-CIMB 2018-05-04: 1Q18 Mobile Service Revenue Missed STARHUB LTD SGX: CC3

Starhub - 1Q18 Mobile Service Revenue Missed

  • StarHub's 1Q18 results missed, with core EPS coming in at 21% of our FY18 forecasts.
  • Weak mobile and pay TV, but Fixed Enterprise revenue stayed healthy.
  • EBITDA margin eased 2.1% pts y-o-y on higher cost of services and marketing costs.
  • Core EPS to fall 11.4%/21.0%/12.3% in FY18/19/20F on our revised forecast.
  • Maintain HOLD with an 11% lower DCF-based target price of S$2.40.

1Q18: Results missed expectations

  • StarHub prepared its 1Q18 results and retrospectively adjusted its 1Q-4Q17 numbers, in accordance with SFRS 15. 
  • 1Q18 normalised EBITDA fell by 7.4% y-o-y (-0.6% q-o-q) due to lower service revenue and margin. Core EPS fell a steeper 20.8% y-o-y (-13.0% q-o-q) mainly on higher depreciation and amortisation. 1Q18 EBITDA/core EPS was below expectations at 23%/21% of our FY18 forecasts (consensus: 25%/24%). A key variance is lower-than-expected mobile service revenue. 
  • 1Q18 DPS was S$0.04 (1Q17: S$0.04).

Mobile service revenue stayed under pressure

  • Mobile service revenue fell 7.1% y-o-y (-10.1% q-o-q) in 1Q18 due to:
    1. lower IDD, voice and excess data usage,
    2. higher mix of SIM-only plans and
    3. higher amortisation of contract assets.
  • Both prepaid and postpaid subs fell 2.1% and 0.2% q-o-q, respectively. Prepaid ARPU fell by 7.1% q-o-q due to lower voice/IDD usage, while postpaid ARPU dropped 6.5% q-o-q on lower excess data usage due to higher take-up of DataJump and unlimited weekend data plans.

Pay TV remains vulnerable; broadband sees mild growth

  • StarHub’s pay TV revenue fell 9.9% y-o-y (-8.4% q-o-q) in 1Q18 as subs fell for the eleventh quarter in a row, down 2.0% q-o-q to 449k. ARPU was steady q-o-q (-2% y-o-y) at S$51. 
  • 1Q18 broadband revenue rose 0.6% y-o-y (+0.2% q-o-q) on steady ARPU y-o-y (+3.1% q-o-q) at S$33. Broadband subs grew slightly by 0.4% q-o-q (net adds: 2k).

Fixed Enterprise revenue growth stays healthy y-o-y

  • Fixed Enterprise revenue grew a healthy 18.0% y-o-y, mainly due to the consolidation of Accel Systems & Technologies (ASTL) from Jul 17 and D’Crypt from Jan 18. q-o-q, revenue fell 10.0%, mainly due to seasonally weaker managed services (-15.0%) and voice revenue (-33.6%).

Weaker normalised EBITDA margin y-o-y

  • Normalised EBITDA margin on service revenue eased 2.1% pts y-o-y (+2.6% pts q-o-q) to 31.5%. This was mainly due to higher cost of services (consolidation of ASTL and D’Crypt), marketing and other costs.

Core EPS to fall 11% y-o-y in FY18F

  • We cut FY18-20F core EPS by 4.1-14.4% (EBITDA: 3.2-7.4%), mainly to factor in lower mobile service revenue and adjustments for SFRS 15. 
  • We forecast core EPS to fall 11.4%/21.0%/12.3% in FY18/19/20F. 
  • 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.

Maintain Hold with an 11% lower target price of S$2.40

  • Maintain HOLD with an 11% lower DCF-based Target Price of S$2.40 (WACC: 7.1%) due to our earnings cut. 
  • While its 13.5x FY18F EV/OpFCF is at an 18% discount to the ASEAN telco average, we believe this is justified due to its declining earnings outlook. 
  • A good entry point is below S$2.00 (bear case) and exit point above S$2.80 (bull case). 
  • Key upside/downside risks are lower-/higher-than-expected impact from TPG’s entry.

FOONG Choong Chen CFA CGS-CIMB | 2018-05-04
SGX Stock Analyst Report HOLD Maintain HOLD 2.40 Down 2.700