StarHub - OCBC Investment 2019-05-06: More Post-Paid ARPU Erosion Awaits


StarHub - More Post-Paid ARPU Erosion Awaits

  • Well-expected dividend cut.
  • Putting plans into motion.
  • Maintain Fair Value of S$1.64.

In-line results

  • STARHUB LTD (SGX:CC3)’s 1Q19 results were within our expectations. Revenue rose 6.0% y-o-y to S$596.8m, boosted by higher contribution from the Enterprise Business and Sales of equipment, but partially offset by lower revenue from Mobile, Pay TV and Broadband.
  • StarHub’s Mobile segment registered a 5.3% y-o-y decline in revenue, due to lower IDD, voice and excess data usage revenue and lower data subscription and value-added services revenue.
  • Pay TV continued to show weakness, dropping 12.4% y-o-y to S$70.7m.
  • As we understand from management, the group’s Cyber security division saw an EBITDA loss of ~S$5m. Service EBITDA margin was 2.0 ppts higher y-o-y at 33.7%; excluding the SFRS (I) 16 accounting change on operating leases, the margin would have been lower by 1.7 ppts y-o-y at 30.0% instead.
  • Profit from operations fell 13.9% y-o-y to S$72.1m, though if we were to strip out the Cyber security services, there would have been a gain of S$4.9m instead. The group’s PATMI fell 14.2% y-o-y to S$54.0m, which constitutes 27.7% of our full-year forecast.
  • StarHub has declared a DPS of 2.25 S-cents, which is a steep but well-expected cut from 4 S-cents in 1Q18.

Rolling out its plans

  • In the mobile space, we note that the group has added 74k post-paid subscribers to its customer base, which we believe stems from greater SIM-only take up. Unsurprisingly, this has continued to weigh on ARPU, which has dropped by S$4 y-o-y to S$39. Management believes this trend would likely continue until the end of 2019.
  • Management is currently still in the process of negotiating with content providers (as contracts come up for expiry) to operate on a variable Pay TV cost model, rather than a fixed cost one. As we understand, there is one more major contract left to renegotiate.
  • StarHub continues to articulate its intention to capture opportunities in the Cyber security business, but the timeline as to when it turns EBITDA positive remains unclear.
  • Since our downgrade in mid-Feb (see report: StarHub - First Cut Is The Deepest), StarHub's share price has declined by 16.8%. StarHub is now trading at an EV/EBITDA multiple of 6.3x, which is 2.3 S.D. below its 5–year mean. We maintain our Fair Value of S$1.64 for now but upgrade our rating from Sell to HOLD.

Joseph Ng OCBC Investment Research | 2019-05-06
SGX Stock Analyst Report HOLD UPGRADE SELL 1.640 SAME 1.640