StarHub - UOB Kay Hian 2018-05-04: 1Q18 Revenue Contraction For Mobile And Pay-TV

StarHub - UOB Kay Hian 2018-05-04: 1Q18 Revenue Contraction For Mobile And Pay-TV STARHUB LTD SGX: CC3

StarHub - 1Q18 Revenue Contraction For Mobile And Pay-TV

  • The mobile and pay-TV businesses registered revenue contraction of 7.1% and 9.9% y-o-y respectively.
  • StarHub lost subscribers for both post-paid and pre-paid mobile. The revenue decline from pay-TV has become an entrenched secular trend.
  • The new CEO will lead a strategy refresh that will be launched around July/August.
  • Maintain SELL. Target price: S$2.25.



RESULTS

  • StarHub reported net profit of S$61.5m for 1Q18, down 14.9% y-o-y compared with a restated 1Q17. This is the first set of results reported under SFRS (I) 15.
  • Mobile: Headwinds from competition intensify. StarHub lost 3,000 post-paid subscribers and 20,000 pre-paid subscribers q-o-q in 1Q18. Post-paid ARPU dropped 4.5% y-o-y to S$43 while pre-paid ARPU dropped 7.1% y-o-y to S$13. The decline was a result of lower usage of iDD voice and lower contribution from excess data charges. In aggregate, mobile service revenue contracted 7.1% y-o-y.
  • Pay-TV: In secular decline. StarHub lost another 9,000 pay-TV subscribers this quarter. This is the 11th consecutive quarter of contraction for its pay-TV subscriber base caused by piracy in the form of illegal set-top boxes and online video streaming. Pay-TV subscriber base contracted 7.8% y-o-y. Pay-TV ARPU was stable at S$51. Pay-TV revenue dropped 9.9% y-o-y, commensurating with the contraction of its pay-TV subscriber base.
  • Residential Broadband: Losing the edge. StarHub gained 2,000 broadband subscribers q-o-q. ARPU inched higher by S$1 q-o-q to S$33.
  • Enterprise Fixed: The main engine for growth. Revenue from Data & Internet grew 1.7% y-o-y to S$72.9m. Revenue from managed services more than doubled to S$36.8m. Half of the growth for managed services was derived from newly-acquired Accel Systems & Technologies and D’Crypt. Enterprise Fixed is the second-largest source of revenue after Mobile.
  • Change in accounting standard results in profits from sale of handsets. Based on the new accounting standard SFRS (I) 15, StarHub made S$7.7m from sale of handsets in 1Q18. Cost of services increased 10.6% y-o-y due to consolidation of Accel Systems & Technologies and D’Crypt. Thus, service EBITDA margin was stable at 32.1%.


STOCK IMPACT

  • Maintain guidance for 2018. Management guided that service revenue would be 1-3% lower for 2018. Service EBITDA margin is expected to narrow to 27-29% due to competition for mobile, pay-TV and broadband businesses. Management maintains its guidance for capex at 11% of total revenue (exclude spectrum payments). StarHub intends to maintain dividend at 4 S cents per quarter for 2018.
  • Appoints new CEO. StarHub has appointed Peter Kaliaropoulos as Group CEO with effect from 9 Jul 18. Peter has over 35 years of experience in the global ICT sector. He is currently CEO of Zain Saudi Arabia and Advisor to the Vice Chairman of Zain Group. He led Zain Saudi Arabia to its first-ever net profit in 2017 after 10 years of operations. He has also previously taken up senior leadership roles at BT (Asia Pacific), Telstra (Australia & USA), Optus (Australia), Clear (New Zealand), Batelco (Middle East) and Ooredoo (Kuwait). He was a key member of StarHub's senior executive team that launched commercial operations in the Singapore market in Apr 2000.
  • Peter was selected due to his strong leadership capabilities beyond conventional frameworks and his understanding of market dynamics in an intensely competitive market environment. He has also led a significant number of acquisitions.
  • Securing MyRepublic as wholesale customer. StarHub and MyRepublic have formed a Mobile Virtual Network Operator (MVNO) partnership with StarHub. The agreement will enable MyRepublic to utilise StarHub’s mobile network infrastructure to offer mobile services in Singapore. The MyRepublic brand resonates with Singapore’s younger, more tech-savvy crowd. This is StarHub’s first foray into the MVNO business.


EARNINGS REVISION/RISK

  • We revised our earnings forecast to conform to SFRS (I) 15. Our net profit forecast for 2018F and 2019F are revised up by 14.6% and 2% respectively, but our net profit forecast for 2020F is revised down by 10.5%.


VALUATION/RECOMMENDATION

  • Maintain SELL. 
  • Our target price of S$2.25 is based on DCF (COE: 7.0%, and terminal growth: 1.5%).


SHARE PRICE CATALYST

  • Dividend yield is attractive at 6.9% for 2018 but could drop to 5.2% 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 | https://research.uobkayhian.com/ 2018-05-04
SGX Stock Analyst Report SELL Maintain SELL 2.250 Same 2.250



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