StarHub - RHB Invest 2018-11-12: Some Reprieve, From Opex Efficiency Plans

STARHUB LTD (SGX:CC3) | SGinvestors.io STARHUB LTD (SGX:CC3)

StarHub - Some Reprieve, From Opex Efficiency Plans

  • Maintain NEUTRAL based on higher DCF Target Price of SGD1.90 from SGD1.78, 2% downside plus 8% FY19F yield.
  • StarHub's 3Q18 results beat expectations, suggesting the market may have been overly bearish on near-term prospects. The bright spot remains the enterprise segment, which should continue to be the group’s growth pillar.
  • We raise FY19F-21F core earnings by 6.6%/12.8%/4.1%, mainly to factor in opex savings from the operational efficiency exercise announced in early October and stronger growth at the enterprise fixed segment.
  • At 7.2x FY19F EV/EBITDA, valuations are at a discount to its historical mean, which we believe is justified given concerns over competition and execution.
  • Prefer Singtel (SGX:Z74) for exposure to Singapore telcos.



Ahead of expectations

  • 3Q18 core earnings fell 8% q-o-q from lower service EBITDA/margin, mainly from a one-time adjustment for traffic cost (SGD5m). Results were nonetheless ahead of estimates as we/market had projected a more bearish outlook for 2H.
  • The key growth driver remains the enterprise fixed segment (21% of revenue), which grew 13% y-o-y (9M18: +18%). This partially offset the extended weaknesses in mobile (-4.2%) and pay-TV revenues (-14.1%).
  • An SGD0.04 DPS was declared, as expected.


Mobile service revenue (MSR) was flat on quarter

  • Mobile service revenue (MSR) was flat on quarter vs Singtel’s -2.3% and M1’s (SGX:B2F) -2.5%, on stronger appeal of its roaming plans. It was down 7.4% in 9M18 due to higher take-up of SIM-only plans, data add-on packages and the complimentary unlimited weekend data. Consequently, postpaid ARPU slipped to SGD44 despite the growth in postpaid base (+1%), which includes that of MyRepublic (MR).
  • Prepaid subs base slipped for the third consecutive quarter with marginally higher prepaid ARPU of SGD14 (2Q18: SGD13).
  • Average mobile data usage widened to 5.9GB per month from 5.5GB per month in 2Q18.

Enterprise business to see improved synergies and scale under Ensign

  • The merger of StarHub’s cyber security arm with Temasek’s regional cyber security service provider has transformed the group into one of the largest end-to-end cyber securities providers in Asia. The deal – completed in October – is earnings-accretive from the onset with merger synergies to accrue over time.
  • We had previously estimated net earnings accretion of 0.7% for FY18F and 4.7% for FY19F from Ensign, based on management’s guidance of over SGD100m in combined revenues.


No light at the end of the pay-TV tunnel

  • Pay-TV churn accelerated to a record 15,000 in 3Q18 (9M18: -8.5%) as more subs come out of contracts. With the monthly SGD4 rebate extended on subscription for the earlier cessation of 11 channels by end-August and the higher base of the World Cup in 2Q18, ARPU fell a sharp 11% q-o-q to SGD47.
  • StarHub will cease to operate its hybrid fibre coaxial (HFC) network with full migration to fibre/IPTV by end-Jun 2019. There will be no one-off cost or accelerated depreciation associated with the migration.
  • Given the structural decay in the industry’s pay-TV revenues, management believes the current business model where content cost is fixed would have to evolve to a variable model for the longer-term viability of the business.


Operational efficiency exercise.

  • In early October, StarHub unveiled a strategic transformation program to better align the group in meeting industry challenges. The plan, which includes a headcount reduction of 300 permanent staff and other opex rationalisation, is expected to contribute to opex savings of SGD210m over three years from FY19. The one-off cost related to the staff layoffs of SGD25m had already been provided in 4Q17.
  • With part of opex savings expected to be realised reinvested to fund new growth opportunities, net savings would be lower.


Maintain NEUTRAL, DCF Target Price (WACC: 7.6%, TG: 1.5%) raised to SGD1.90

  • We raise FY19F-21F core earnings by 6.6%, 12.8%, and 4.1%, mainly to factor in opex savings from the operational efficiency exercise and stronger growth at the enterprise fixed segment.
  • Post adjustments, FY17-21F core earnings are expected to decline by a CAGR of 6%.
  • StarHub trades at 7.2x FY19F EV/EBITDA, a discount to its historical mean – which we believe is justified given concerns over competition and execution.
  • Key risks are: stronger-than-expected competition (from the entry of TPG Telecom); lower dividend payouts going forward; and ticipated opex savings.





Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-11-12
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.90 UP 1.780



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