StarHub - Maybank Kim Eng 2018-05-04: Not Starstruck; HOLD

StarHub - Maybank Kim Eng 2018-05-04: Not Starstruck; Hold STARHUB LTD SGX: CC3

StarHub - Not Starstruck; HOLD


1Q18 in line after restatement; Est.’s unchanged

  • StarHub restated 2017 results and indicated a SGD50m cash tax impact to reflect new accounting standard SFRS 15 pertaining to contract reporting; based on the restated disclosure only for 1Q17A, there appears to be little impact on the bottom line and operating cashflows, but a material reallocation of segment results. 
  • Despite some uncertainty in making comparisons after the restatement, StarHub’s 1Q18 revenue and net profit were generally in line with low expectations (ours and consensus). We remain cautious and reiterate HOLD, with the shares fairly valued based on our unchanged DCF-based Target Price of SGD2.27 and likely to drift given the uncertainty over future competition. 
  • In the sector, we prefer Singtel (Rating: HOLD, Target Price: SGD3.69), which has a more regionally diversified risk profile.



Sector profitability to weaken due to competition

  • We anticipate increased competition in 2H18 will erode profitability due to the continued entry of new players with cheaper plans. 
  • During 1Q18, the wireless and pay TV businesses remained under pressure from competitive pressure, while enterprise/fixed network provided some relief to service revenues. This supports our cautious view on the sector, despite overall sector share price weakness the past 12 months.


Bottom line impact nil, segment allocation large

  • The impact of SFRS 15 on contract reporting standards has resulted in a material restatement to 1Q17 business segment results, with service revenues 15% lower than previously reported but equipment sales 138% higher. However, total 1Q17 revenues, EBITDA, and core net profit are only c1% lower after the restatement. 
  • Despite the restatement, operating cashflows remained similar to that initially reported and we leave our forecasts unchanged; We thus also maintain our DCF-based Target Price of SGD2.27 (WACC 5.3%, LTG -1%).


Maintain HOLD; More competition to come

  • With the number of competitors increasing over the next 12-18 months, including StarHub’s MVNO with unlisted MyRepublic, we do not rule out risk to our base-case scenario of gradual revenue erosion. As such, maintain HOLD despite StarHub's share price underperformance against the STI. 
  • A worse-than-expected competitive environment is the downside risk, while early departure of new competitors offers upside potential to our outlook.


Summary of accounting change impact to Singapore telco industry

  • The SFRS 15 (based on IFRS 115) accounting standard that revises contract accounting standards is being implemented by Singapore companies starting this quarterly reporting period but applied retroactively to January 2017 financial statements. Prior calendar 2017 disclosures are thus not a fair comparison and will be restated.
  • As Singapore telco businesses are significantly equipment contract based, the implementation has a material impact on the timing of revenue recognition.
  • Before, revenues recorded mirrored customer billing and cash received, but with the new standard revenues will be front loaded with the theoretical standard selling price (SSP) as customers’ sign what used to be called subsidy based contracts. Service revenues (and ARPU) will take the optical hit from this change.
  • Reported ARPU for 2017 onwards will be significantly lower as revenue is shifted to equipment revenue from service revenue. Revenues will also be front loaded during the period of equipment contracting signing, and now there will be no equipment subsidies as SSP will be higher than the handset cost. This means for Singapore telcos calendar 4Q will be a period of high equipment sales and low service revenues as it is also the typical period of re-contracting with new handset launches.
  • Operating cashflows are not materially impacted as long as billing and collection procedures remain unchanged with current practice. There is a one-time cash-tax impact from retained earnings changes, caused by the restatement of revenues and profits retroactive to 2017.


Impact specific to StarHub

  • The most material change to StarHub’s income statement post SFRS 15 has been the restatement of service revenues and handset sales. This is consistent with the general industry expectations discussed above.
  • For restated 4Q17, this resulted in a significant 163% increase in core profit to SGD61m versus the SGD23m under the previous accounting standard. We do not have the level of restated equipment/handset sales for 4Q17 but believe an elevated level of re-contracting sales is the main reason for the profit variance.
  • We await the restated full-year 2017 financials to evaluate any material full-year impact but the 1Q17 financials are indicative of minimal changes at the profit line.


Swing Factors 


Upside 

  • Potential source of new revenues from Enterprise segment targeting, including government contracts revolving around the Smart Nation initiatives. 

Downside 

  • Re-contracting/retention costs rising 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 due to new competition. 
  • Further investments in enterprise or content space that may have a lengthy gestation period before realizing returns. 





Luis Hilado Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-05-04
SGX Stock Analyst Report HOLD Maintain HOLD 2.270 Same 2.270



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