StarHub - Maybank Kim Eng 2018-07-06: Value Has Emerged

StarHub - Maybank Kim Eng 2018-07-06: Value Has Emerged STARHUB LTD SGX:CC3

StarHub - Value Has Emerged


Much is priced in. Upgrade to BUY

  • Even after reducing our forecasts and Target Price, StarHub is offering respectable upside to value investors and thus we upgrade to a BUY with a SGD1.96 DCF-based Target Price (WACC 5.7%, LTG -1%).
  • At current levels, StarHub's share price is implying extreme scenarios of pay TV revenues going to zero or that wireless service revenues drop a further c15% from our estimates.
  • With the impact of TPG still to be felt we acknowledge short-term risk but believe the stock has more than priced in long-term profit erosion.



Earnings downgrade from knock on effect of pay TV

  • With StarHub ending its Discovery Network contract, we factor in a negative impact on the bundled/hubbing revenues in addition to its pay TV business. io.
  • We believe our revised service revenue CAGR decline of 2% over 2017-20E is fair given the telco will partially mitigate wireless revenue pressure with its recent MVNO contract with unlisted MyRepublic in 2H18 onwards.
  • Nonetheless, we reduced our 2018E/19E core profit forecasts and Target Price by 4%/5% and 14%, respectively. Our forecasts are generally in line with FactSet consensus estimates.


Value play. Not an earnings recovery play.

  • We believe StarHub's share price is now discounting an overly drastic drop of both wireless and/or pay TV revenues in the long-term and as such is now offering value to long-term investors.
  • StarHub 2018E is trading at more than 1SD below its 5 and 10-year mean P/E’s. We anticipate the profit decline from intensifying competition but also expect resurgent FCF following the payment of the 700Mhz frequency license fees in FY19.


Priced for a worse case

  • We acknowledge that the challenges remain for the industry incumbents in the short-term but believe that StarHub is pricing an even worse case scenario.
  • Key risk to our BUY is a scenario where the incumbents engage in a price war themselves rather than let their MVNOs fight in the low price segment against TPG.


Summary of assumptions

  • Wireless service revenues decline by a 4% CAGR over 2017-20E as subscribers utilize MVNO services to ensure they do not exceed their usage caps with the incumbents.
  • Pay TV revenues fall by 17% CAGR over the same period as online content piracy continues to challenge the business model.
  • Fixed network and enterprise revenues grow by a 10% CAGR over the period.
  • As a result, consolidated revenues over the period reduce by 2%.
  • EBITDA margins to total revenues to decline to 24% in 2020E from 26% in 2017.
  • Core profit consequently drops by a 14% CAGR over the period.
  • We have also assumed the fixed DPS starting 2019E will be reduced to SGD0.10 (prospective implied yield of 6%) from SGD0.16 which will enable long-term free cashflow to cover dividend payments. We believe the market is already anticipating a DPS cut. We would not rule out, and would encourage, a shift to a profit ratio based minimum payout rather than a fixed DPS policy. This would avoid concerns of paying dividends beyond net income and the increased leverage that results.
  • We have assumed the SGD282m license fee for the 700Mhz frequency will be paid in 2019E but this could be further delayed.


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 or from incumbents. 
  • Material 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/ 2018-07-06
SGX Stock Analyst Report BUY Upgrade HOLD 1.96 Down 2.270



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