StarHub - RHB Invest 2019-02-15: Dialling Down On Dividends


StarHub - Dialling Down On Dividends

  • Maintain NEUTRAL, DCF Target Price (WACC: 7.6%, TG: 1.5%) raised to SGD2.02 from SGD1.90; 6% upside plus 5% yield after rolling forward our base year. Refer to the PDF report attached for DCF valuation details.
  • FY20F EV/EBITDA of 6.1x is at 1.5SD below its historical mean, which we believe factors in the stiff mobile competition and headwinds plaguing the pay-TV and broadband businesses.
  • Key risks are stronger-than-expected competition from TPG Telecom and execution of its transformation plans.

Dividends go variable.

  • STARHUB LTD (SGX:CC3) has instituted a new dividend payout policy to reflect the change in market dynamics. It will fully transition into a variable payout of at least 80% of core earnings from FY20.
  • FY19 DPS is guided at SGD0.0225 per quarter or total payout of SGD0.09, below the SGD0.16 paid in the last two years. The 4Q18 DPS of SGD0.04 will be paid in May.

4QFY18 In line.

  • StarHub's 4QFY18 headline earnings were marred by one-offs/provisions (leasing contract for the migration of cable customers to fibre, customer loyalty redemptions, adjustment for handset revenues based on Singapore Financial Reporting Standard (SFRS) 15 and losses from Ensign InfoSecurity (Ensign) and D’Crypt). Stripping these out, 4Q18 core earnings slumped 25.1% q-o-q (-32.1% y-o-y) from weaker EBITDA and higher depreciation.
  • While the seasonal uplift in handset sales drove the 6.4% q-o-q jump in group revenue, service revenue slipped 0.5% q-o-q with declines across the mobile, pay-TV and broadband segments. Enterprise fixed business remains the bright spot (+17% q-o-q; +16% for FY18).
  • We raise FY19F-21F core earnings 1-7% after adjusting for SFRS 15 and housekeeping.

Mobile service revenue (MSR) -9% q-o-q

  • Mobile service revenue (MSR) -9% q-o-q (-13.7% y-o-y) on lower usage revenue, higher mix of SIM-only plans and handset subsidies. Excluding provision for customer loyalty redemptions, MSR fell 2.3% q-o-q (-8.% y-o-y/FY18: -6.2% y-o-y).
  • Postpaid ARPU narrowed 7% q-o-q to SGD41 while prepaid ARPU was steady at SGD14. SIM-only plans now make up a double-digit percentage of its subs base (including MyRepublic).
  • Management said the response from the simplification of its mobile plans via the Hello Change campaign (launched last December) has been positive.

Enterprise fix to remain the key growth driver.

  • Ensign (which is the product of the merger between StarHub’s cyber security arm with Temasek’s Quann) contributed maiden revenue of SGD33.3m (7% of enterprise fixed revenue) and EBITDA of SGD0.5m in FY18, albeit with recording a LAT of SGD3.4m.
  • Managed services revenue was up a strong 42.2% y-o-y (+84.3% YTD), supported by cyber-security/digital solutions.

Still no light at the end of the pay-tv tunnel.

  • Pay-TV revenue has contracted for the 15th successive quarter due to over-the-top (OTT) substitution and piracy.
  • APRU slipped to SGD49 in FY18 (FY17: SGD51).

Singapore Research RHB Securities Research | 2019-02-15
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 2.02 UP 1.900