Starhub - CGS-CIMB Research 2018-11-05: Back To Waiting On The Sidelines


Starhub - Back To Waiting On The Sidelines

  • Mobile and pay TV revenue outlook for FY18-20F is negative, with decline not likely to be fully offset by growth in fixed network services revenue.
  • We estimate core EPS to decline by a 3-year CAGR of 22% (FY17-20F), despite factoring in cost savings from its operational efficiency programme.
  • Downgrade from Add to HOLD. Our DCF-based target price remains S$2.00.

Negative outlook for mobile and pay TV revenue

  • We expect StarHub’s mobile revenue (45% of FY18F service revenue) to decline by 7.5%/7.1%/8.9% in FY18/19/20F, due to intensifying competition from TPG’s entry into the market.
  • Broadband revenue is likely to be flattish in FY18-20F as the positive effects from subs upgrading to higher-speed plans diminish.
  • StarHub’s pay TV revenue would decline by 8.8% CAGR between FY17-20F due to competition from alternative over-the-top video platforms and proliferation of pirated set-top boxes, based on our forecasts.

Fixed network services is the only bright spot for growth

  • StarHub’s fixed network services business (27% of FY18F service revenue) is the only bright spot for growth, in our view.
  • We forecast this segment’s revenue to register 7.7% CAGR between FY17-20F, driven by healthy demand for managed services. However, we do not expect this to fully offset the negative outlook for mobile and pay TV, and we forecast total service revenue to drop by a 3-year CAGR of 3.1% between FY17-20F.

Operational efficiency programme to cushion the blow

  • In early Oct, StarHub announced its operational efficiency programme, which it expects to realise S$210m in savings across FY19-21F. This includes the laying off of 300 employees (11.8% of its end-FY17 workforce), as well as additional jobs being made redundant from ongoing natural attrition and tighter management of contractor roles.
  • StarHub also targets savings in procurement activities, leasing costs, network/systems repairs and maintenance, as well as sales and distribution expenses.

Core EPS to decline by a 3-year CAGR of 22% between FY17-20F

  • We have factored in cumulative service opex savings of S$193m over FY19-21F as StarHub says the net savings from the operational efficiency programme would be less than S$210m, as part of the savings will be directed to fund growth opportunities.
  • We forecast core EPS to decline by 23.6%/13.6%/29.5% in FY18/19/20F. Our FY18-20F DPS forecasts of S$0.10 p.a. are intact, supported by average FCF/share of S$0.12 (ex-spectrum payments).
  • We estimate its net debt/EBITDA peaks at 2.3x in FY21F.

Downgrade to Hold; DCF-based target price unchanged at S$2.00

  • StarHub’s share price has risen 20% since mid-Aug 2018. We believe this factors in the potential cost savings from its operational efficiency programme. As such, we downgrade StarHub from Add to HOLD, with an unchanged DCF-based target price of S$2.00 (WACC: 7.1%).
  • StarHub’s 14.3x FY19F EV/OpFCF is in line with the ASEAN telco average.
  • Key upside/downside risks: smaller-/bigger-than-expected negative impact from TPG’s entry.

FOONG Choong Chen CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-05
SGX Stock Analyst Report HOLD DOWNGRADE ADD 2.000 SAME 2.000