StarHub - UOB Kay Hian 2018-11-12: 3Q18 Streamlining Cost Structure; Restructuring Pay-TV Business

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

StarHub - 3Q18: Streamlining Cost Structure; Restructuring Pay-TV Business

  • StarHub’s mobile business is troubled by intense competition while its pay-TV business faces a secular decline in subscriber base. However, fixed enterprise business continues to grow from strength to strength driven by managed services.
  • StarHub’s operational efficiency programme would have a positive impact on bottom line starting 1Q19.
  • Maintain BUY. Target Price: S$2.30.


3Q18 RESULTS

  • StarHub reported a net profit of S$57m for 3Q18, down 12.8% y-o-y from a restated 2Q17. The results were below our expectation of S$63.2m due to a one-off adjustment to traffic expenses of S$5m.

Mobile: Headwinds from increased competition.

  • StarHub added 9,000 post-paid subscribers in 3Q18, a similar pace compared to that in 2Q18. Post-paid ARPU declined 7.7% y-o-y to S$44 due to lower iDD revenue, lower excess data charges (higher take-up for DataJump and free unlimited weekend data plans) and a higher mix of SIM-only plans.
  • Average usage of data increased 32.2% y-o-y to 5.9GB.

Pay-TV: In secular decline.

  • StarHub lost a record 15,000 pay-TV subscribers due to competition from alternative content and piracy. This marks the thirteenth consecutive quarter of contraction for its pay-TV subscriber base.
  • Pay-TV ARPU dropped 8% or S$4 y-o-y to S$47 due to rebates given to customers for cessation of channels, such as the Discovery Channel, Animal Planet and Eurosport.

Residential Broadband: Steady, stable and profitable contribution.


  • StarHub gained 2,000 broadband subscribers in 3Q18. Subscriber base expanded at a slow but steady pace of 1.5% y-o-y. ARPU was stable at S$32. Revenue contribution also edged marginally higher by 1.5% y-o-y to S$46.8m.

Enterprise Fixed: Delivered double-digit revenue growth.

  • Revenue from managed services grew 77.5% y-o-y to S$41.6m driven by Accel Systems & Technologies (consolidated starting Jul 17) and D’Crypt (consolidated starting Jan 18). Revenue from data and internet decreased 3% y-o-y to S$71.9m.
  • Fixed enterprise was the second largest source of revenue after Mobile.

Service EBITDA margin narrowed by 2ppt yoy, excluding one-time adjustment.

  • Depreciation decreased 4.1% y-o-y due to a higher proportion of plant and equipment being fully depreciated. Traffic expenses increased 34.5% y-o-y due to higher roaming costs (higher take-up for data travel plans) and a one-off adjustment of S$5m.
  • Service EBITDA margin narrowed 3.4ppt y-o-y to 28.8%. Excluding the one-time adjustment to traffic expenses, service EBITDA margin would be at 30%.


STOCK IMPACT


Maintain guidance for 2018.

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

Determined to restructure pay-TV business.

  • Management admitted that the business model for pay-TV is broken. Pay-TV is affected by competition from over-the-top (OTT) content and piracy. Some content providers are also going direct to viewers. Despite the many headwinds, many content providers charge a high fixed fee for broadcast rights regardless of viewership while others impose a minimum guarantee.
  • Management intends to adopt a variable cost model for content. It is in negotiations with various content providers. Some contracts are up for renewal in 4Q18 and 2H19. Management is prepared to walk away from new contracts should content providers insist on status quo, just as they did with Discovery Channel. StarHub expects the reduction in cost of content to be greater than the erosion in pay-TV ARPU.
  • In the past, telcos subsidised cost of content to drive broadband penetration. In the context of Singapore, broadband penetration is already high at 92.4%. Thus, there is no justification for StarHub to continue subsidising content.

Retiring its legacy HFC network.

  • StarHub is migrating its customers for both residential broadband and pay-TV to an all-fibre network. The move will help StarHub reduce the cost of leasing a portion of the infrastructure from competitor Singtel.
  • StarHub has previously accelerated the depreciation for its hybrid fiber-coaxial (HFC) network. Thus, there would not be negative impact from accelerated depreciation when StarHub ceases provision of cable services after 30 Jun 19.

Scaling up in cyber security.

  • The merger of Accel Systems & Technologies and Quann World to form Ensign InfoSecurity was completed on 4 Oct 18. Ensign has the capabilities to perform complex cyber security jobs.
  • Management estimates revenue contribution from Ensign at S$100m on an annualised basis. The size of the cyber security market in Singapore is estimated at S$715m and growing at 15% p.a..


EARNINGS REVISION/RISK

  • We keep our earnings forecast for 2019 unchanged.


VALUATION/RECOMMENDATION

  • Re-iterate BUY. Our target price of S$2.30 is based on DCF (COE: 8.25% and terminal growth: 1.0%).


SHARE PRICE CATALYST

  • Dividend yields are attractive at 8.3% for 2018, 6.2% for 2019 and 5.2% for 2020.
  • Savings in opex and capex from operating efficiency programme and network sharing.





Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-12
SGX Stock Analyst Report BUY MAINTAIN BUY 2.300 SAME 2.300



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