StarHub - UOB Kay Hian 2018-08-08: 2Q18 New CEO Injects New Vigour

StarHub - UOB Kay Hian Research 2018-08-08: 2q18: New Ceo Injects New Vigour STARHUB LTD SGX:CC3

StarHub - 2Q18: New CEO Injects New Vigour

  • StarHub’s revenue from the mobile segment contracted 6.6% y-o-y on post-paid ARPU erosion while pay TV revenue declined 4.8% y-o-y on the loss of 11,000 subscribers. Fixed enterprise revenue grew 22.4% y-o-y, driven by growth of the managed services segment through the acquisition of Accel Systems & Technologies and D’Crypt.
  • New CEO Peter Kaliaropoulos will work on protecting StarHub’s high-value mobile customer base, adopting a variable cost model for content and pursuing growth for fixed enterprise.
  • Maintain HOLD with a new target price of S$1.92. Entry price: S$1.65.



2Q18 RESULTS

  • StarHub reported a net profit of S$61.7m for 2Q18, down 22.9% y-o-y compared to a restated 2Q17. The results were in line with our expectation of S$63.1m.


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Mobile: Erosion of post-paid ARPU.

  • StarHub gained 11,000 post-paid subscribers, a reversal compared to a loss of 3,000 post-paid subscribers in 1Q18. 
  • Post-paid ARPU declined 8.1% y-o-y to S$45 due to less iDD calls and excess charges for data. Average usage of data has increased 37.5% y-o-y to 5.5GB. 
  • StarHub lost 36,000 pre-paid subscribers although pre-paid ARPU was stable at S$13.

Pay TV: In secular decline.

  • StarHub lost 11,000 pay TV subscribers as more contracts were up for renewal this quarter. This is the 12th consecutive quarter of contraction for its pay TV subscriber base, caused by piracy in the form of illegal set-top boxes and online video streaming. Pay TV ARPU gained S$2 q-o-q to S$53 due to the 2018 FIFA World Cup. 
  • We estimate that 27,500 subscribers took up the 2018 FIFA World Cup package.

Residential broadband: Maintains revenue contribution.

  • StarHub gained 2,000 broadband subscribers in 2Q18. ARPU eased S$1 q-o-q to S$32. Revenue contribution from broadband was stable at S$46m.

Fixed enterprise: Main engine for growth.

  • Revenue from the data and internet segment decreased 16.2% y-o-y to S$74.2m. Revenue from managed services grew 9.2% q-o-q to S$40.2m, driven by the newly-acquired Accel Systems & Technologies and D’Crypt. 
  • Fixed enterprise is the second largest source of revenue after mobile.


STOCK IMPACT


Maintains guidance for 2018.

  • Management guided that service revenue would be 1-3% lower y-o-y for 2018. Service EBITDA margin is expected to narrow to 27-29% due to competition in the mobile, pay TV and broadband businesses. 
  • Management maintains its guidance for capex at 11% of total revenue (exclude spectrum payments). StarHub intends to maintain a dividend at 4 S cents per quarter for 2018.

New CEO injects new vigour.

  • New CEO, Peter Kaliaropoulos, came on board on 9 Jul 18. Peter sees StarHub’s current strategy as sound and feels that it is under- represented in the fixed enterprise space. He will pursue growth by offering differentiated and bundled solutions, such as managed services, analytics and cyber security, on top of its connectivity services.
  • On the mobile front, he sees ARPU challenged by the proliferation of SIM-only plans. StarHub will protect its base of high-value mobile customers against encroachment by the 4th mobile operator TPG Telecom. StarHub intends to adopt a variable cost model for content, subject to negotiation with content providers. It will also look into providing more flexibility for customers to select their preferred content. 
  • StarHub will also embark on a cost optimisation programme in 2H18.

MVNO partnership.

  • StarHub and MyRepublic have formed a Mobile Virtual Network Operator (MVNO) partnership. The agreement will enable MyRepublic to utilise StarHub’s mobile network infrastructure to offer mobile services in Singapore. This is StarHub’s first foray into the MVNO business. The partnership allows StarHub to offer customers more choices and better address different customer segments.
  • MyRepublic launched three packages with high-speed data of 7GB, 12GB and 25GB at S$35, S$55 and S$85 respectively in June. All three plans have the “Boundless Data” feature. Customers would still be able to access data after consuming their monthly data allowance but data speed is throttled down to 384Kbps to 1.2Mbps. MyRepublic plans to cross-sell to its base of 70,000 fibre broadband subscribers in Singapore. Existing MyRepublic broadband subscribers get an extra 3GB or 8GB of data.


EARNINGS REVISION/RISK

  • Our earnings forecast are relatively unchanged as results were within our expectations.


VALUATION/RECOMMENDATION

  • Maintain HOLD. Our new target price of S$1.92 is based on DCF (COE: 9.25%, and terminal growth: 1.0%).


SHARE PRICE CATALYST

  • Dividend yield is attractive at 9.5% for 2018 but could drop to 7.1% in 2019.
  • Erosion for pay TV and residential broadband businesses.
  • Risk from entry of TPG Telecom as the fourth mobile operator.





Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-08-08
SGX Stock Analyst Report HOLD Maintain HOLD 1.92 Down 1.980



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