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

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.

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 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.

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.

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.

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.

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