StarHub - DBS Research 2019-04-17: Look For Better Bargains Elsewhere


StarHub - Look For Better Bargains Elsewhere

  • Wait for better clarity on cyber-security and signs oftangible cost savings for entry.
  • StarHub's FY19F dividend yield of 5.9% not too appealing vs.peers to await earnings recovery in FY20F.
  • Maintain HOLD with lower Target Price of S$1.55.

StarHub should offer 50-80 basis points higher yield than Singtel due to muted growth prospects.

  • StarHub's share price has slid ~13% YTD amid concerns over cyber-security losses, leading to steeper declines in EBITDA, which has been a critical factor for the share price. While the counter is cheap at -2SD on forward PE and EV/EBITDA multiples and a dividend yield of 5.9%, we prefer to wait for better clarity on its cyber-security operations as many cyber-security companies, worldwide, struggle to generate positive EBITDA.
  • On a comparative basis, we expect StarHub (SGX:CC3) to offer 50-80 basis points higher yield (6.0%-6.3%) than SingTel (SGX:Z74)’s 5.5% yield due to its muted growth prospects.

Where We Differ:

  • Our FY20F earnings are 9% above consensus. This largely stems from
    1. our projection of ~S$20m lower depreciation (post SFRS 16) over FY20F with savings accrued from the expiry of the Hybrid Fibre Coaxial (HFC) leasing agreement with SingTel, and
    2. our expectation that amortisation of the 700MHz spectrum will not start until FY21, as Indonesia still uses this spectrum for Analogue TV.

Potential Catalysts:

  • Clarity on cyber-security operations with 1Q19F results briefing, end of HFC migrations in June 2019 and commercial launch of TPG in late 2019.


Maintain HOLD with lower Target Price of S$1.55.

  • We depart from our DCF-based valuation in favour of relative valuation given the lack of clarity over its growth prospects. We value StarHub at 6.5x FY19F EV/EBITDA, at a 20% discount to 8.1x regional average, to reflect dim outlook in the near term, valuing the counter at S$1.55 vs. our previous DCF-based Target Price of S$1.92

Key Risks to Our View:

  • Bear-case valuation is S$1.30 if TPG disrupts and cyber-security loses expand. StarHub could see a 10% drop in FY19F EBITDA under this scenario vs our base case.
  • Network sharing and profits from cyber-security could lead to bull case valuation of S$1.94. We project a 5% improvement to our base-case FY19F EBITDA and a network sharing deal by the end of FY19F.

WHAT’S NEW - Dim outlook for StarHub in the near term

We cut StarHub’s mobile service revenue by 2% for FY19F/FY20F.

  • We revise down our expectations on mobile service revenue for StarHub by 2% from our previous forecasts, implying 6.7%/7.3% decline in mobile service revenue respectively, in line with our revised forecasts for the sector.
  • Our forecast factors in postpaid subscriber base migrations to SIM-only plans (already a double-digit proportion of StarHub’s postpaid sales) and impact of the revamped SIM-only plans (Hello Mobile) through lower excess data usage revenues and revisions to SIM-only ARPU.
  • We also expect StarHub’s mobile service revenue to see some impact, with the launch of TPG’s services over 2Q19, largely stemming from potential disruption to the revenue flow from MyRepublic, StarHub’s MVNO partner. We expect 2020 to be even worse, with TPG, having ramped up its capex to meet in-tunnel coverage requirements, takes the fight on the mobile front mainstream, potentially leading to price wars with the incumbent operators.

Growing fixed line segment to offer some respite to the topline.

  • StarHub’s enterprise fixed services segment expanded 16% y-o-y over FY18, with managed services (~35% of fixed services) including cyber-security expanding ~84% y-o-y.
  • StarHub has been keen to expand its enterprise services, with a focus on cyber-security in a bid to offset declines in mobile and pay-TV segments. We expect managed services and cyber-security segments to record 32/50% growth over FY19F, given the small scale of operations and potential order wins given StarHub’s ambitious plans to expand these segments. Declines in legacy voice and data and Internet services could partially offset growth in managed services and cyber-security, allowing StarHub to expand its enterprise fixed services segment by low-double digits in FY19F.
  • Growth in the enterprise fixed segment would allow StarHub to arrest the decline in service revenues at ~2.6% over FY19 (excluding one-offs in FY18) in our view.

Expansion of cyber-security could eat in to StarHub’s cost savings in the near term.

  • Ensign, StarHub’s cyber-security arm provides Managed Security Services (provision of outsourced monitoring and management of security devices and systems) to enterprise and government organisations. MSS services are heavily labour intensive with the need to acquire high quality cyber-security talent, which tends to be expensive given the shortage of cyber-security professionals globally. Opex also tends to be higher for MSSPs with the need to operate security monitoring centres. As a result, despite strong prospects of growth offered by cyber-security ventures, the business tends to carry low-margins until ample scale is ramped up.
  • We take cues from SecureWorks, a leading MSSP in North America and Singtel’s cyber-security division. Secureworks has repeatedly posted negative EBITDA over consecutive quarters in the recent past while Singtel’s cyber-security segment has remained EBITDA negative over the past two years.
  • With StarHub’s ambitious plans to grow cyber-security revenues in the near term, we believe losses from cyber-security could mount up, potentially offsetting the S$210m gross cost savings announced by StarHub in 2018.
  • Management is expected to provide better clarity on the operations of Ensign, including growth trajectory and margin profile in the 1Q19 results briefing, which should allow us to better understand the prospects of StarHub’s cyber-security enture.

StarHub likely to post a decline in EBITDA over FY19F.

  • StarHub is likely to witness a decline in EBITDA (pre and post-SFRS 16) over FY19F, with higher cost of services and marketing expenses in 1H19 arising from the ongoing migration of subscribers from HFC to the National Broadband Network (NBN), weighing down EBITDA. Potential savings on content costs in the Pay-TV segment with the renegotiation of contracts to a variable cost base however, could partially offset higher cost of services.
  • StarHub is also likely to record higher overheads over FY19F with the ongoing expansion of the cyber-security and managed services segments, both of which tend to be labour and opex intensive businesses that carry lower margin profiles than traditional mobile and legacy IT services. We believe the net effect of cost savings announced by StarHub in 2018 would be minimal over FY19, as bulk of the cost savings StarHub is likely to accrue over FY19F would likely be reinvested in the business during the year. This coupled with lower revenues from Pay-TV and mobile would further exacerbate the decline in EBITDA over FY19F.
  • With the adoption of SFRS 16 over FY19, StarHub would be capitalising some of its operating leases as right-of-use (ROU) assets, allowing for a reduction in opex relating to operating lease expenses with a subsequent increase in StarHub’s depreciation and amortisation. Post-SFRS 16, we expect StarHub to record a 1.3% decrease in EBITDA over FY19F.

FY19/20F earnings cut by 8%.

  • We revise down our FY19/20F earnings forecast for StarHub by 8% as we ratchet down our projections of mobile service revenue and incorporate potentially higher expenses from expansions in cyber-security and ICT operations.
  • Our earnings decline over FY20F is partially offset by lower amortisation expenses, as we now project the amortisation of spectrum fees of S$282m for the 700MHz spectrum to start in FY21F from 2H20F earlier.

Lack of clarity in the near term prompted us to switch to relative valuation techniques.

  • We depart from our DCF-Based valuation in favour of relative valuation techniques given the uncertainties and lack of clarity over StarHub’s operations in the near term. We await better clarity on StarHub’s cyber-security operations in 1Q19F and for signs of tangible cost savings to gain a better understanding of how StarHub’s operating expenses could evolve going forward.
  • Furthermore, StarHub is expected to finalise a network sharing deal with a domestic operator towards the latter part of the year, which could allow both operators to save a significant portion of their capex spend. Management is expected to provide better clarity and progress of this deal at the 1Q19F results briefing, which should provide a better understand the trajectory of StarHub’s 5G capex spend.
  • Given the near-term uncertainties, we value StarHub at 6.5x FY19F EV/EBITDA, at a 20% discount to regional averages to reflect the uncertainties and weak prospects of EBITDA and earnings in the near term.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-04-17
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.550 DOWN 1.92