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


StarHub - First Cut Is The Deepest

  • Deep dividend cut.
  • Tough finding the silver lining.
  • Fair Value of S$1.64.

Results in-line

  • 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.

Dividend cut

  • 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.

Rough times ahead

  • 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 | 2019-02-15
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.64 DOWN 1.920