StarHub - RHB Invest 2018-05-04: Lacking Catalysts

StarHub - RHB Invest 2018-05-04: Lacking Catalysts STARHUB LTD SGX: CC3

StarHub - Lacking Catalysts

  • Maintain NEUTRAL with DCF-derived Target Price adjusted to SGD2.50 from SGD2.65, for 8% upside (WACC: 7.5%, TG: 1.5%) post SFRS (I) 15.
  • StarHub’s 1Q18 results met expectations. The strong enterprise fixed services showing was insufficient to offset the feeble mobile business, resulting in service revenue declining 1.4% y-o-y.
  • The MVNO collaboration with MyRepublic should hopefully stem the decline in mobile service revenue.
  • StarHub’s share price has underperformed the FSSTI by 24% YTD – the worst performing Singapore telco – on concerns over competition. Prefer Singtel for exposure.

Broadly in line

  • StarHub's 1Q18 core earnings formed 25% and 27% of our and consensus forecasts respectively. An expected SGD0.04 DPS was declared (payable on 25 May), with the stock backed by a prospective dividend yield of over 5%. 
  • As with M1 (M1 SP, NEUTRAL, TP: SGD1.95), StarHub’s numbers were retrospectively adjusted for the Singapore Financial Reporting Standards (International) (SFRS (I) 15 – revenue from contracts with customers – which took effect from 1 Jan.

Mobile still the dim spot, managed services executing well

  • Mobile service revenue (MSR) fell 7.1% y-o-y (-10.1% q-o-q) due to the contraction in overall subs base (-23,000 in 1Q18), weaker overall usage/IDD and lower excess data monetisation, with customers having access to greater data bundles and unlimited weekend data. This contrasts with M1’s MSR gain of 3% y-o-y, which was bolstered by stronger contributions from its mobile virtual network operator (MVNO) customer, Circles.Life (CL). 
  • Pay-TV revenue has narrowed for 12 consecutive quarters on cannibalisation from alternative viewing platforms and piracy. The bright spot remains its fixed/enterprise services segment, up 18% y-o-y with maiden contribution from D-Crypt (digital security outfit) and Accel Systems Technologies (ASTL) acquired in FY17.

MyRepublic (MR) calls in

  • MyRepublic announced its MVNO tie-up with StarHub yesterday. In a media release, the fixed broadband operator said its focus will be on Singapore’s “younger, more tech-savvy crowd”, with plans and bundles to be unveiled very soon. 
  • The latest tie-up adds to the already fairly crowded MVNO space with Singtel (ST SP, BUY, TP: 4.10) and M1 already playing hosts to Zero1, Zero Mobile and CL. We expect StarHub to align its MVNO strategy to eventually compete with/target TPG Telecom, which is slated to roll out its service in 2H18.

Guidance revised post SFRS (I) 15.

  • Management has reaffirmed its previous service revenue guidance of a 1-3% y-o-y decline for FY18, but adjusted its EBITDA margin guidance to 27-29% post–SFRS (I) 15 from 24-26% (pre-SFRS(I) 15). The service EBITDA margin is now computed net of handset margin. 
  • Our FY18-20 core earnings forecasts have been lowered by 10.2%, 4.8%, and 11.2% respectively to reflect the accounting policy changes, which are cashflow neutral. 
  • Key risks are stronger-than-expected competition and downside dividend surprise.

Singapore Research RHB Invest | 2018-05-04
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.50 Down 2.650