StarHub - DBS Research 2018-06-26: Not Attractive Yet Despite Big Correction

StarHub - DBS Vickers 2018-06-26: Not Attractive Yet Despite Big Correction STARHUB LTD SGX: CC3

StarHub - Not Attractive Yet Despite Big Correction

  • Valuation premium disappears with 44% contraction in StarHub stock price YTD.
  • StarHub should trade at 12-month forward EV/EBITDA of 5.6x vs 7x regional average, reflecting its declining EBITDA prospects.
  • Upgrade to HOLD with a revised Target Price of S$1.42.



Upgrade to HOLD as StarHub is not trading at a premium anymore.

  • With ~44% correction in StarHub’s share price YTD, the valuation premium has disappeared. 
  • StarHub is likely to see an annual EBITDA contraction of 4% over FY17A-20F vs 3% for M1 as Pay TV-mobile unbundling will hurt StarHub more.
  • We argue that StarHub should trade at 12-month forward EV/EBITDA of 5.6x, at a 20% discount to the regional average of 7x to reflect its weak prospects.


Where we differ: Expect sharp cut in dividends in FY19F.

  • StarHub has committed to payout S$277m in annual dividends in FY18. However, we estimate that StarHub’s shareholder equity value will be wiped out in 2020 if it continues with similar magnitude of dividends. As such, we project, StarHub to bring its dividends to match the net profit level.
  • While, we have assumed 100% payout ratio from FY19F onwards, StarHub should, ideally, retain some earnings to invest in new business opportunities in our view.


Potential Catalyst – Commercial success of MyRepublic and/or news on TPG’s launch.

  • Execution effectiveness of MyRepublic’s partnership with StarHub and any delay in TPG’s commercial launch, which is slated for late 2018, could benefit the stock.



Valuation:

  • Upgrade to HOLD with a lower Target Price of S$1.42.
  • Due to a lack of clarity on future free cash flows, we switch to peer multiple-based valuation. We value StarHub at 12-month forward EV/EBITDA of 5.6x at ~20% discount to the 7x regional average.


Key Risks to Our View:

  • Bear-case valuation is S$1.17 if TPG causes severe disruption. StarHub could see a 10% drop in FY19F EBITDA under this scenario vs our base case of 7% drop. We use 5.0x 12-month forward EV/EBITDA to derive our bear-case TP. 
  • TPG delaying the launch by 12 months or more may lead to bull-case valuation of S$1.72. StarHub could see a 2% drop in FY19F EBITDA under this scenario vs our base case of 7% drop. We use 6.2x 12-month EV/EBITDA to derive our bull-case Target Price.


CRITICAL DATA POINTS TO WATCH


ARPU dilution likely with growing adoption of SIM-only plans.

  • We believe SIM-only plans will rise in popularity over the medium term, with lengthening smartphone replacement cycles and aggressive promotions by MVNOs. StarHub’s 1Q18 postpaid ARPU declined ~4% with the rising uptake of SIM-only plans and higher uptake of unlimited weekend data plans.
  • We expect StarHub’s postpaid ARPU will contract ~3.5% annually over FY18-20F, reflecting the growing uptake of SIM-only plans and tightening price competition in the industry with the entry of TPG in 2H18.
  • We have also assumed StarHub to record 5% annual contraction of mobile revenues over FY18-20F, in line with our industry base case, vs our previous assumption of ~2% annual contraction of mobile revenues.

Hubbing strategy under pressure.

  • StarHub’s go-to market strategy of bundling mobile, broadband and Pay-TV services is under pressure from the proliferation of over-the top (OTT) TV services. As at the end of FY17, nearly 24,000 customers with subscriptions to three or more services have downgraded since 1Q16, representing ~7% of subscriptions with three or more services. Majority of these customers are moving away from Pay-TV to cheaper alternatives such as Netflix, despite losing the discount available on bundled services in the process.
  • We believe downgrades of hubbing subscriptions would accelerate amid the increasing appeal of OTT TV services among high-end Pay TV customers and rising pressure on the broadband segment from M1 and MyRepublic. As this is a critical success factor for StarHub, there could be near term impact on the company's share price as the structural decline is unlikely to reverse.

Strengthening enterprise business is a positive.

  • StarHub managed to expand revenues from the enterprise segment 18% y-o-y in FY18, largely driven by the consolidation of Accel Systems and D’Crypt. The acquisitions made in the cyber- security and cryptographic technology space should further augment StarHub’s ICT service portfolio, which continues to drive the telco’s enterprise segment. The newly acquired capabilities would also pave way for StarHub to capitalise on major government and commercial cyber security tenders pertaining to the ongoing Smart City projects.
  • Our channel checks also indicate that StarHub is competing aggressively on the ICT front with the market leader, and we expect some market share grab by StarHub through competitive pricing. As such, we believe the enterprise segment would remain a key driver of StarHub’s topline going forward. However, as ICT services carry lower margins, we do not expect the incremental EBITDA to be substantial enough to offset any potential EBTIDA losses in the Pay-TV and mobile segments.





Sachin MITTAL DBS Vickers | https://www.dbsvickers.com/ 2018-06-26
SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 1.42 Down 2.050



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