StarHub - RHB Invest 2019-05-06: Expanding Cyber Security Losses


StarHub - Expanding Cyber Security Losses

  • Maintain NEUTRAL with DCF-based Target Price (WACC: 7.4%, TG: 1.5%) lowered to SGD1.72 from SGD2.02, 9% upside.
  • STARHUB LTD (SGX:CC3)’s 1Q19 results were broadly in line with our estimate (26%) but ahead of Street’s projection (29%). We believe the sharp share price underperformance YTD has priced in downside risks from competition and concerns over cyber-security losses, with valuations at 2SD below the historical EV/EBITDA mean.
  • Key risks are stronger-than-expected competition (TPG Telecom) and higher-than-expected losses from its cyber-security division.

Broadly in line.

  • StarHub's 1Q19 core earnings (post Singapore Financial Reporting Standard (SFRS) 16) fell 14.3% y-o-y, mainly from cyber-security losses, weaker mobile service revenue and higher depreciation. y-o-y/QoQ comparisons were distorted by the implementation of SFRS 16 (effective Jan 2019), with no retrospective adjustments.
  • Overall growth continues to be driven by the enterprise business (+14.1% y-o-y) but offset by declines across the mobile, pay-TV and broadband segments.
  • 1Q19 service EBITDA margin (pre-SFRS 16) improved 5ppts q-o-q to 30.7% on lower equipment, marketing and content costs. A SGD0.0225 1Q19 DPS was declared, consistent with the variable payout policy (80% of PATAMI) instituted earlier.
  • Post results, we lower our FY19-21F core earnings by 9-11%, mainly to factor in higher losses from the cyber-security arm and SFRS 16 adjustments.

Mobile service revenue (MSR) dipped 1% q-o-q (-5.3% y-o-y)

  • StarHub's mobile service revenue (MSR) dipped 1% q-o-q (-5.3% y-o-y) from the seasonally stronger 4Q18, dilution from SIM-only plans, and lower excess data charges. Consequently, postpaid ARPU slipped 5% q-o-q to SGD39 despite stronger net-additions (+36,000).
  • Prepaid ARPU dropped 7.1% q-o-q to SGD13, but the decline in the prepaid subscriber (subs) base was arrested. Overall data usage expanded to 6.3GB in 1Q19, from 6.1GB in 4Q18 and 4.9GB in 1Q18.

Enterprise business scaling up but should remain earnings-dilutive in the medium term from cyber-security expansion.

  • StarHub's enterprise revenue grew 14.1% y-o-y, driven mainly by the cyber-security business (Ensign consolidated from 4Q18), which jumped 41.1% y-o-y. Ensign contributed SGD26.4m in 1Q19 revenue (1Q18: SGD18.6m) but recorded losses of SGD5m and SGD9m at the EBITDA and PATAMI levels. This stemmed from higher opex, specifically headcount and depreciation.
  • Management said it will continue to invest for growth, which suggests the cyber-security business should remain earnings-dilutive in the medium term.

Pay-TV revenue continues to slide

  • StarHub's pay-TV revenue continues to slide 12.4% y-o-y from over-the-top (OTT) cannibalisation and piracy.
  • Management said it is on track to convert cable customers to fibre by end-June.

Singapore Research RHB Securities Research | 2019-05-06
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.72 DOWN 2.020