StarHub - DBS Research 2018-05-07: Premium Valuation Despite Weak Outlook

StarHub - DBS Vickers 2018-05-07: Premium Valuation Despite Weak Outlook STARHUB LTD SGX: CC3

StarHub - Premium Valuation Despite Weak Outlook

  • StarHub's 1Q18 earnings of S$62.8m (-13% y-o-y) marked 7th consecutive quarter of y-o-y earnings decline; excluding one-offs, earnings were 8% below our estimate. 
  • Trading at 9x FY18F EV/EBITDA versus regional 7x average despite prospects of EBITDA decline. 
  • Maintain FULLY VALUED with a revised Target Price of S$ 2.05. 

The counter is expensive despite an attractive 7% dividend yield.

  • We expect StarHub’s mobile and Pay TV revenues to deteriorate further in FY18F/19F owing to rising competitive pressures. StarHub’s mobile revenue trends have been much weaker than its peer M1 reflecting the need for improved execution. 
  • StarHub is expensive at a forward PE of 17x and an EV/EBITDA of 9x vs. sector averages of 12x and 7x respectively despite the weak outlook. 

Where we differ:

  • With StarHub is currently paying out S$277m in annual dividends, more than the estimated free cash flow of S$230m-240m, we project dividends to match free cash flow going forward. 
  • In our opinion, telcos need to lower their reliance on the carriage model and invest in new business opportunities where balance sheet strength may play a key role. 

Potential Catalyst – Mobile strategy of MyRepublic.

  • MyRepublic has struck a partnership with StarHub to enter the Singapore mobile market as a Mobile Virtual Network Operator (MVNO). Better clarity of the mobile plans and strategy of MyRepublic could help the market gauge the potential impact on StarHub’s mobile revenues. 


Maintain FULLY VALUED with a lower Target Price of S$2.05. 

  • We lowered our DCF based Target Price to S$2.05 from S$2.20 as we raised our WACC to 7.0% from 6.0% to reflect higher volatility in the stock price. 

Key Risks to Our View: 

  • Limited uptake of TPG’s and strong expansion of enterprise business. StarHub may outperform our expectations if TPG fails to gain traction or if StarHub’s enterprise segment were to record high double digit growth over the next three years. 

WHAT’S NEW - Bottomline on a downward spiral

Earnings contraction continued despite lower opex.

  • Earnings of S$62.8m (-13% y-o-y, +345% q-o-q) were in line with our expectations of S$61m. However, excluding ~S$5m one offs for reversals of accruals, underlying net profit of S$57.2m was below our expectations of S$61m. 
  • Key disappointment came from higher than expected rise in costs despite lower service revenue. Cost of services (mainly for content costs) rose to S$118m, up 11% y-o-y despite pay TV revenue declining 10% y-o-y.

Mobile service revenue contraction of 7% y-o-y is a concern.

  • Revenue of S$ 561m (-4.7% y-o-y, -13.6% q-o-q) was in line with our expectations of S$ 564m. 
  • Mobile revenue after restatements contracted 7% y-o-y driven by subscriber losses and contraction of ARPUs. StarHub’s subscriber base contracted 1% q-o-q which could be due to an aggressive M1 poaching high-end subscribers with its MySim plans. Postpaid ARPU also declined 4% y-o-y driven by declining data yields and higher contract amortisation costs. 
  • Pay TV revenues entered the ninth consecutive quarter of annual declines, contracting 10% in 1Q18. Pay TV subscriber losses continued in 1Q18 and nearly 79,000 subscribers, representing 17% of StarHub’s current subscriber base, have now left StarHub’s Pay TV services since 1Q16. 
  • Enterprise services expanded 18% y-o-y driven by the consolidation of Accel Systems and D’Crypt partially offsetting lower mobile and Pay TV revenues.

Partnership with MyRepublic could offer some respite to declining mobile revenues but waiting for better clarity.

  • MyRepublic has struck a partnership with StarHub to enter the Singapore mobile market as a Mobile Virtual Network Operator (MVNO). 
  • MyRepublic, known for its aggressive pricing strategies and generous data allowances, is in a strong footing after securing S$70m in funding from Singapore-based Makara Capital and is likely to cause further woes in the already heated data market. 
  • We understand that M1 and Circles.Life spent 2-3 years on developmental efforts before the actual launch in 2016. In that sense the MVNO partner has fill-in-the gaps left by the telco operator. While MyRepublic has yet to disclose its service plans, we believe that it would place heavy emphasis on data given its target market of “Tech-Savvy youth”, further pressuring already depressed data yields. 
  • We believe contributions from MyRepublic would offer some stability to StarHub’s declining mobile revenues but we wait for better clarity on MyRepublic’s strategy for the mobile market and effective execution of its partnership with StarHub.

Sachin MITTAL DBS Vickers | https://www.dbsvickers.com/ 2018-05-07
SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 2.05 Down 2.200