StarHub - Maybank Kim Eng 2019-05-06: Transition Continues


StarHub - Transition Continues

Target Price cut by 8%. Maintain BUY on restructuring theme

  • With slightly weaker-than-expected 1Q19 wireless revenues and the impact of new lease accounting treatment, we cut our 2019E/20E/21E core profit estimates by 13%/13%/10% and DCF-based Target Price 8% to SGD2.00 (WACC 5.7%, LTG -1%).
  • Management has made significant progress in STARHUB LTD (SGX:CC3)'s business restructuring which will stabilize earnings next year and provide the cash-flow to sustain its SGD0.09 minimum DPS policy.
  • With a healthy 27% upside to our revised Target Price and 5.7% dividend yield, we maintain BUY.
  • Risk: irrational competition in the wireless or enterprise space.

Adopting lower end of guidance

  • StarHub's 1Q19 revenue, EBITDA and core profit were 25%/26%, 26%/28% and 22%/25% of MKE/consensus FY2019. We believe the performance was in line to a slight beat of consensus.
  • Although the 1% y-o-y decline in service revenue was in line with our FY19, we note slightly weaker wireless service revenues, most likely due to the internal cannibalisation of traditional post-paid contract plans with the new SIM-only promotions. As such, we reduced our consolidated service revenue to -1.5% (from - 0.9%), which is the lower end of management guidance of flat to -2%.

New accounting: boost to EBITDA, bane to profit

  • New operating lease accounting treatment (SFRS 16) led to the slight EBITDA beat in 1Q19, but it conversely weakened profit partly due to the increase in D&A expense as leases are now capitalised and amortised. Likewise, the notional lease liabilities raise interest expense.
  • The combined impact of our revenue revision and the new accounting treatment resulted in the cuts to our core profit estimate and Target Price.

Looking beyond the short term

  • Based on the update provided by management, StarHub is well into executing on the business restructuring of all its businesses with c70% of plans in execution. Even efforts to overhaul the pay TV content cost structure is in its final stage with only one major content provider to be negotiated with.
  • Although competition has lowered our profit expectation for this year and next, the restructuring of operations and stronger balance sheet will support the dividend yield, in our view.

Luis Hilado Maybank Kim Eng Research | 2019-05-06
SGX Stock Analyst Report BUY MAINTAIN BUY 2.00 DOWN 2.180