StarHub - DBS Research 2018-11-02: Frontloading Of Costs To Expedite Migration To NBN By 18 Months


StarHub - Frontloading Of Costs To Expedite Migration To NBN By 18 Months

  • StarHub will cease operating its Hybrid Fibre Coaxial (HFC) Network by June 2019, ahead of the earlier proposed timeline in 2020.
  • Front-loading of migration costs in FY19F but big savings from absence of HFC lease rentals would flow in FY20F, ahead of our expectation of FY21F onwards.
  • We will revise our earnings estimates after the release of 3Q18F results. BUY with an unrevised Target Price of S$2.45.

What’s New

StarHub expedites transition to fibre.

  • StarHub announced on 1 November 2018 that it plans to cease providing broadband and Pay-TV services using its Hybrid Fibre Coaxial (HFC) Network by June 2019, ahead of the earlier proposed date of disconnection in 2020. Accordingly, all existing Pay-TV and broadband subscribers on the HFC Network would be transitioned to the National Broadband Network (NBN) by June 2019, and StarHub would decommission its HFC network in the nine months after June 2019.
  • StarHub has brought the timeline forward so that customers can enjoy faster internet surfing speeds as well as higher quality pay TV services with better interactivity and smarter features.
  • StarHub would also be well prepared to adopt new, transformative digital services such as in tele-health, asset monitoring and remote learning that will depend on high-speed, low latency communications networks running on fibre.

Our View

Pay-TV subscriber losses likely but broadband subcribers should remain largely intact.

  • Based on 2Q18 results, StarHub has ~78,000 (17%) broadband subscribers on the HFC network and we estimate that ~ 90,000-100,000 Pay-TV subscribers are currently on HFC due to the convenience of multiple cable TV socket points in the home.
  • We expect the majority of broadband subscribers on the HFC network to migrate to fibre, as StarHub offers 500Mbps fibre broadband plans at ~25% discount to its 100Mbps cable broadband plans, along with free installation.
  • The transition however, offers an opportunity for other fixed broadband players such as MyRepublic to capitalise on the situation through aggressive pricing.

There could be an adverse impact of ~S$15-20m on our FY19F earnings due to the accelerated migration.

  • We expect to see a sharp rise in StarHub’s cost of services in FY19F as migrations to NBN accelerate. Assuming StarHub pays S$13.80 per month for each fibre line for 90,0000-100,000 subs, this translates to ~S$15m in annual fibre leasing cost for StarHub.
  • In addition, StarHub may have to waive initial installation cost of fibre in homes without fibre coupled with other incentives. This could add another one-time cost of S$15-20m according to our estimates.

No migration costs in FY20F and earlier than expected lease savings.

  • FY20F earnings could benefit by S$5-10m from nil migration costs. StarHub would also benefit from savings of ~S$25m in lease expenses on the HFC network in FY20F (not factored in our model yet), followed by ~S$30m savings each year.
  • We await better clarity and guidance from the management to factor this impact in our model.

Maintain BUY with an unrevised Target Price of S$2.45.

  • We use DCF (WACC 7%, terminal growth 0.5%) to derive our Target Price and project FY19F dividend yield of 5.3%.
  • StarHub’s valuation is attractive, trading close to -2SD of its historical EV/EBITDA and PE averages and offers sustainable dividend yields of ~5.3%.

Sachin MITTAL DBS Group Research | 2018-11-02
SGX Stock Analyst Report BUY MAINTAIN BUY 2.450 SAME 2.450