StarHub - OCBC Investment 2019-02-15: First Cut Is The Deepest

STARHUB LTD (SGX:CC3)

StarHub - First Cut Is The Deepest

STARHUB LTD (SGX:CC3)’s 4Q18 revenue fell 9.8% y-o-y to S$619.5m, with all segments registering a y-o-y decline barring Enterprise Fixed.

Mobile service revenue fell 13.7% y-o-y due to lower IDD, voice and data usage revenue, lower subscription revenue on the back of higher phone subsidies, as well as a higher mix of SIM-Only plans.
StarHub’s Pay TV service revenue saw a 19.1% y-o-y decrease on the back of a lower subscriber base.
With the consolidation of Ensign and D’Crypt, Enterprise Fixed service revenue grew 12.0% y-o-y.
Excluding provisions and adjustments, underlying service EBITDA margin would have fallen 2.3%pts y-o-y to 25.4%.
On a full-year basis, StarHub’s underlying NPAT came in at S$215m, which would have formed 97.2% of our FY18 forecast. We deem this set of results to be broadly in-line.
4Q18 postpaid ARPU decreased by ~10.9% y-o-y to S$41 while Pay TV ARPU dropped ~5.9% y-o-y to S$48.

Moving forward, we note that StarHub will be adopting a new variable dividend policy with a 80% payout ratio on net profit attributable to shareholders (excluding one off, non-recurring items).
We note that StarHub intends to pay 9 S-cents/share for FY19 as part of this transition, with any additional payment to occur in 4Q19. This comes in below ours and the street’s FY19F dividend expectation.

Management notes that there will be some service revenue volatility ahead as a result of new entrants (e.g. TPG Telecom, MVNOs), putting some stress on mobile ARPUs.
Management also shared their view that especially with TPG Telecoms entry, there are now far too many operators in a market with constrained growth in the consumer segment, and some form of network-sharing (especially with the advent of 5G) would be rational.
In the Pay-TV segment, while it is encouraging that StarHub has managed to renegotiate some contracts to a new model away from fixed pricing, we believe that structural challenges still remain.
We roll forward our valuations, and adopt a more conservative approach with 8.3%-13.8% cuts to our FY19-FY20 earnings estimates. Together with other adjustments, our Fair Value drops from S$1.92 to S$1.64.
Thus, we downgrade Starhub from Hold to SELL.

Joseph Ng OCBC Investment Research | https://www.iocbc.com/ 2019-02-15

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.64 DOWN 1.920