StarHub - RHB Invest 2018-08-08: The Connectivity Challenge

StarHub - RHB Securities Research 2018-08-08: The Connectivity Challenge STARHUB LTD SGX:CC3

StarHub - The Connectivity Challenge

  • Maintain NEUTRAL with marginally lower DCF-derived Target Price of SGD1.78 (WACC: 7.5%, TG: 1.5%) from SGD1.90, 5% upside.
  • StarHub's 1H18 results made up 62% of our full-year forecast but came in below consensus (57% of market estimates), which we consider to be broadly in line as we expect a weaker 2H. The enterprise fixed segment remained the bright spot, up 20% y-o-y in 1H18. This was however insufficient to compensate for the decline in mobile and pay-TV revenues, which are facing structural compression.
  • We trim our 2019F-2020F core earnings by 1-6%, mainly to factor in higher margin dilution from the greater push into the enterprise fixed businesses and housekeeping adjustments.
  • The stock is down 40% YTD with valuations at -2SD below historical EV/EBITDA mean, with prospective dividend yield at over 7%. We prefer Singtel (SGX:Z74).

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Weaker 2H expected.

  • StarHub reported a 3% q-o-q decline in core earnings to SGD61.7m, on lower service EBITDA margin and higher tax expense. 1H18 core earnings (-20% y-o-y) formed 62% of our full-year forecast and 57% of consensus estimates.
  • We deem this to be broadly in line with our expectations but below consensus, on expectations of stronger competition in 2H.
  • An expected SGD0.04 DPS was declared (1H18: SGD0.08), payable on 31 Aug.

Pressure points still, enterprise remains the bright spot.

  • Service revenue recovered on positive seasonality (+4.1% q-o-q). This was driven by stronger mobile service revenue (MSR) and enterprise fixed revenue. 
  • StarHub’s mobile service revenue increased 5.2% q-o-q. This was slightly ahead of M1 (SGX:B2F)’s +4% on stronger postpaid subs addition and ARPU, with incremental contributions from MyRepublic (MR), StarHub’s maiden mobile virtual network operator (MVNO) customer, which commissioned its mobile service in June. Mobile service revenue was down 6.6% y-o-y on higher take-up of SIM-only plans. Average postpaid data usage has risen to 5.5GB per sub/mth (1Q18: 4.9GB per sub/mth).
  • Like its peers, StarHub’s enterprise fixed segment continues to be the fastest growing segment, up 22.4% y-o-y in 2Q18 (+4.3% q-o-q) (1H18: +20%). This was underpinned by growth in managed services (+175% y-o-y), with the consolidsation of Accel Systems and Technologies (ASTL) from 2H17 and D-Crypt from 1Q18. Excluding both entities, enterprise revenue was up 9% y-o-y in 2Q18 and 4% in 1H18.

Pay-TV lifted by World Cup.

  • StarHub’s pay-TV revenue was up 5% q-o-q on higher ARPU from World Cup subcription. Revenue has nonetheless contracted for the 13th consecutive quarter y-o-y, on declining subs and over-the-top (OTT) cannibalisation, a lingering concerrn.
  • On the cancellation of Discovery Network channels (seven channels terminated on 30 Jun to be followed by another four by end-Aug), management said there have been marginal cancellations with the bulk of the 11,000 net-churn from subs in 2Q18 coming out of contracts.

Other highlights.

  • StarHub’s new CEO, Peter Kaliaropoulos (PK) who joined in early July, said StarHub would continue its strategic focus to drive its connectivity business while grabbing a fair share of the enterprise/fixed segment, where it remains under represented. A cost optimisation drive would be implemented in 2H18 to better extract efficiencies in line with the shift in revenue mix.
  • Management said consumer margins are still healthy despite the revenue challenges, while it does not foresee TPG Telecom (TPG) as posing a significant revenue impact until 2019 when its network is fully up and running.
  • Management has reaffirmed its previous service revenue guidance of a 1-3% y-o-y decline for 2018, and adjusted EBITDA margin of 27-29%.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-08
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.78 Down 1.900