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

STARHUB LTD (SGX:CC3)

StarHub - More Post-Paid ARPU Erosion Awaits

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.

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 | https://www.iocbc.com/ 2019-05-06

SGX Stock Analyst Report HOLD UPGRADE SELL 1.640 SAME 1.640