StarHub - Maybank Kim Eng 2018-08-08: 2Q18 As Expected; Risks More Than Priced In

StarHub - Maybank Kim Eng Research 2018-08-08: 2q18 As Expected; Risks More Than Priced In STARHUB LTD SGX:CC3

StarHub - 2Q18 As Expected; Risks More Than Priced In


On track for slower 2H; Estimates unchanged. BUY.

  • StarHub’s 1H18 results overall in line with MKE and consensus estimates of a gradual slowdown caused by the increasingly competitive environment.
  • Maintain BUY and DCF-based Target Price of SGD1.96 (WACC 5.7%, LTG -1%).
  • With TPG’s entry still to be felt in 4Q18 there are risks but believe the stock has too far exceeded our base-case scenario (see report: StarHub - Value Has Emerged | SGinvestors.io) on the downside.



Glimmer of hope

  • StarHub’s 1H18 revenue was 49%/50% of MKE/FactSet consensus full-year forecasts. Increased wireless data usage (+8% q-o-q to 5.5GB per sub), partly from greater adoption of ARPU-enhancing data multiplier plans, drove 4% q-o-q growth in wireless service revenue.
  • The recent MVNO deal with unlisted MyRepublic is unlikely to have contributed materially yet but will provide 2H18 support. Reported profit for 1H18 was 56%/57% of MKE/consensus.
  • Overall, we maintain our forecasts and expectation of weaker profits in 2H18 due to the onset of a new competitor and as re-contracting costs typically rise in 2H, especially 4Q.



~ SGinvestors.io ~ Where SG investors share

New CEO affirms current strategy and guidance

  • New CEO Peter Kaliaropoulos signalled confidence in the current strategy and aims to improve and tweak execution.
  • Guidance of 1-3% lower service revenues and 27-29% service EBITDA margins was unchanged.
  • The EBITDA margin dilution is partly driven by its expansion into the lower margin, but lower capex, fixed-network/enterprise business and not purely due to wireless competition.


Challenging times well captured in the price

  • Challenges remain for the industry incumbents in the short term but we believe the market has priced in an even worse scenario for StarHub. At current levels, StarHub's share price is implying extreme scenarios of pay-TV revenues going to zero or wireless service revenues dropping a further c15% from our estimate.
  • Key risk to our BUY is a scenario where the incumbents engage in a price war rather than let their MVNOs fight in the low-price segment against TPG.


Swing Factors 


Upside 

  • Potential source of new revenues from enterprise segment targeting, including government contracts revolving around the Smart Nation initiatives. 
  • A strong contribution from leasing fees from the MyRepublic MVNO deal. 
  • A muted entry by TPG is a potential upside to valuation and market sentiment. 

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 Research | https://www.maybank-ke.com.sg/ 2018-08-08
SGX Stock Analyst Report BUY Maintain BUY 1.960 Same 1.960



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