StarHub - DBS Research 2018-08-08: Dividend Review In FY19F

STARHUB LTD SGX:CC3

StarHub - Dividend Review In FY19F

StarHub’s net profit of S$62.7m (-22% y-o-y, -0.2% q-o-q) was inline our expectations of S$60-65m. 4Scts DPS was line.
Management hinted at cost reduction initiatives and review of dividend policy for FY19F; we project sharp cut in FY19F dividends.
We value StarHub at 12-month forward EV/EBITDA of 5.6x, ~20% discount to 7x regional average given weak EBITDA prospects. Maintain HOLD with Target Price of S$1.42.

StarHub’s service revenue of S$466.8m (+0.7% y-o-y, +3.5% q-o-q) was marginally above our expectations of S$455m. The positive surprise was largely due to healthy growth of the enterprise business. A 22% y-o-y expansion in revenue from the enterprise fixed services segment, largely with the consolidation of ASTL and D’Crypt driving up revenues from managed services, helped offset losses in mobile and Pay TV segments, resulting in a marginal y-o-y expansion in service revenue.
StarHub’s mobile service revenue of S$ 213.5m (-6.6% y-o-y, +4.1% q-o-q) continued to remain under pressure with the growing uptake of SIM-only plans and lower revenue from subscribers exceeding their data bundles with the availability of unlimited data over weekends and cheaper data add-ons.
StarHub’s pay TV revenue contracted 4.8% y-o-y with the loss of ~11k subscribers despite the football World Cup 2018 occurring during the quarter.
StarHub’s revenue from equipment sales expanded 27% y-o-y as StarHub pushed for more premium handset sales and smart home equipment, bringing total revenue to S$597m (+5.4% y-o-y, +6.5% q-o-q).

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StarHub’s EBITDA of S$155m (-9.7% y-o-y, +2.1% q-o-q) was in line with our expectations of S$150m. Cost of sales increased by 16.5% y-o-y on the back of higher cost of services attached to the provision of enterprise services and on greater equipment costs as StarHub pushed up sales of premium handsets.
Service EBITDA margin for the quarter contracted 480bps from 2Q17 to 30.2% in 2Q18, largely due to higher contributions from the low margin enterprise services business, which accounted for 26% of service revenue vs. 22% in 2Q17. Operating expenses grew 6.5%, driven by an increase in the provision for doubtful debts (primarily due to the longer credit periods made available to enterprise customers), higher impairment of contract assets (recognised when postpaid subscribers leave the network before the end of the contract) and the recognition of a foreign exchange loss.
Depreciation and amortisation expenses expanded 4.7% y-o-y with the amortisation of spectrum rights acquired in 2017, bringing earnings down to S$62.7m (- 22% y-o-y, -0.2% q-o-q).
While StarHub has already achieved 53%/57% of our FY18 projections for EBITDA/earnings in 1H18, we expect a tougher 2H18 from
1. the anticipated entry of TPG and subsequent price competition potentially weighing down mobile revenue further, and
2. dilution of margins with the continued expansion of enterprise services.

We believe SIM Only plans will rise in popularity over the medium term, with lengthening smartphone replacement cycles and aggressive promotions by mobile virtual network operators (MVNOs). StarHub’s 2Q18 postpaid ARPU (average revenue per user) declined ~8% y- o-y 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.

StarHub has committed to a payout of S$277m in annual dividends in FY18. We estimate that StarHub’s shareholder equity value will be wiped out in 2020 if it continues with similar magnitude of dividends.
We project that StarHub will bring down 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.

StarHub ruled out potential M&A activities outside Singapore to grow business. Management’s key focus is to grow enteprise business and digitising the business to cut costs.

StarHub is likely to see an annual EBITDA contraction of 4.4% from FY17A- 20F vs. 2.7% for M1, owing to a contracting Pay-TV business, heavy competition from M1 in the broadband segment, and a lack of support for mobile revenues from an MVNO. While StarHub has struck a MVNO partnership with MyRepublic, which could support the telco’s contracting mobile business, we believe it could take at least 1-2 years before StarHub records any meaningful contributions from MyRepublic.
We argue that StarHub should trade at 12-month forward EV/EBITDA of 5.6x vs. its current valuation of 6.9x, reflecting StarHub’s weak business model and the likelihood that it will be the most affected over the medium term from impending contraction of the mobile industry.

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, which is at ~20% discount to the 7x regional average.

Sachin MITTAL DBS Group Research Research | https://www.dbsvickers.com/ 2018-08-08

SGX Stock Analyst Report HOLD Maintain HOLD 1.420 Same 1.420