StarHub - CGS-CIMB Research 2019-03-25: Not Time To Look Up At The Stars Yet


StarHub - Not Time To Look Up At The Stars Yet

  • StarHub has revised packages & launched aggressive offers since Dec 2018.
  • We are now factoring in larger mobile ARPU erosion and device subsidies.
  • Maintain HOLD with an 18% lower target price of S$1.65.

More aggressive offers from StarHub as competition intensifies

  • In Dec 2018, StarHub (SGX:CC3) launched its new #hellochange postpaid device-bundled and SIM-only plans that contain bigger base data quotas, as well as substantial amounts of free data (valid for 12-24 months). In Feb 2019, StarHub came out with 10GB/50GB (FUP) data add-on offers for S$10/20 per month.
  • In addition, we noted a significant 59% increase in subsidies for the iPhone XR (64GB) for its S$75/month postpaid plan vs. comparably-priced plans in Jun 2018 (iPhone 8, 64GB). Its competitors have done the same, in view of TPG’s commercial launch in 2H19F.

Factoring in larger ARPU erosion & device subsidies in FY19-20F

  • We are now factoring in a 12.5% p.a. erosion in StarHub’s postpaid base ARPU (ex-roaming) in FY19-20F (previous: -10% p.a.). We also raise our device subsidy estimates for FY19-21F, before assuming a gradual decline from FY22F onwards.
  • On the positive side, we now project that StarHub would pay for the 700MHz spectrum in 2H20F and for amortisation to start in FY21F, one year later than our original estimate, due to delays in analogue switch-off in Indonesia (affects 700MHz usage in neighbouring countries).

Earnings and dividend outlook

  • Post-revision, we forecast StarHub’s core EPS to decline by 31.7%/37.5% y-o-y in FY19/ 20F, before rising slightly by 1.7% in FY21F as market competition starts to stabilise.
  • We keep to a DPS of 9 Scts for FY19F, as per StarHub’s guidance. Based on an 80% payout ratio, our DPS estimates drop to 4.2/4.3 Scts in FY20/21F.
  • We project net debt/EBITDA to rise from 1.5x at end-FY18 to a peak of 2.7x at end-FY21F, before easing in FY22F.

Key risk is sizeable mobile ARPU erosion

  • The key downside risk for StarHub is greater-than-expected mobile ARPU erosion.
  • Our sensitivity analysis indicates that if mobile ARPU contracts by 15% p.a. in FY19-20F, our core EPS estimates would fall by 68.1% over FY18-21F (vs. our base case of -56.6%) and our Target Price would be 10.9% lower. If mobile ARPU contracts by 10% p.a. instead, our core EPS estimates would fall by a lesser 44.8% and our Target Price would be 11.5% higher.

Maintain HOLD; target price lowered 18% to S$1.65

  • The impact of the attractive promotions and increased device subsidies may start to show progressively in 1Q-4Q19F, in our view. This, coupled with TPG’s commercial launch in 2H19F, leads us to think investor sentiment on StarHub will stay weak.
  • Our revised DCF-based fair value is S$1.84. However, given the expected sharp drop in FY19-20F core EPS, we believe the stock lacks strong re-rating catalysts. Hence, we apply a 10% to our DCF-based fair value to arrive at a target price of S$1.65.

FOONG Choong Chen CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-25
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.65 DOWN 2.000