StarHub - UOB Kay Hian 2019-05-06: 1Q19 Results In Line, Cautious Outlook With Impending Entry Of 4th Player

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STARHUB LTD (SGX:CC3)

StarHub - 1Q19: Results In Line, Cautious Outlook With Impending Entry Of 4th Player

• StarHub's 1Q19 core net profit declined 14% y-o-y to S$54m. This reflects a 5% y-o-y fall in mobile service revenue, US$11.4m operating loss from cyber security services and higher depreciation. Results are in line with our projected net profit of S$206m for 2019.
• StarHub guides for stable to 2% decline in revenue and service EBITDA margin of 30- 32% for 2019.
• A 2.25 S cents interim dividend was declared.
• Maintain SELL as we remain cautious on its near-term challenging outlook. Target price: S$1.45.

STARHUB's 1Q19 RESULTS

Within expectations.

• STARHUB LTD (SGX:CC3) reported 1Q19 group revenue and net profit of S$596.7m (+6% y-o-y) and S$54m (-14% y-o-y) respectively. Annualised, the results are within our 2019 core net profit forecast of S$206m but ahead of street estimates.
• StarHub has declared a 2.25 S cents cash dividend for 1Q19. StarHub intends to pay out at least 80% of profits as dividend.

STOCK IMPACT

• Mobile service revenue in 1Q19 fell 5% y-o-y and 1% q-o-q on the back of lower IDD, voice and data usage and value-added-services (VAS) revenue. This was partly mitigated by increase in plan subscription and enterprise SMS revenue. StarHub holds 26% of Singapore's mobile market.
• Postpaid customer base increased 36,000 vs 4Q18 or 2.6% q-o-q. Postpaid ARPU fell to S$39/month (4Q18: S$41/month, 1Q18: S$43/month). This reflects lower voice and data usage revenue. Overall average smartphone data usage increased to 6.3 GB – a 29% y-o-y increase from 1Q18.
• Prepaid customer base was 789,000 after 1Q19 net add of 1,000 customers. y-o-y, pre-paid customer base contracted by 129,000 customers with the expiry of tourist SIM cards. ARPU was relatively stable at S$13.
• Enterprise Fixed: Delivered mid-teens revenue growth. Enterprise fixed revenue rose 14% y-o-y but fell 8% q-o-q to S$134.1m thanks to higher managed service revenue, higher cyber security revenue and higher domestic and international voice revenue.
• Pay-TV: In secular decline. StarHub lost another 15,000 pay-TV subscribers due to competition from alternative content and piracy (churn rate went up to 1.5% from 0.9% a year ago). In addition, Pay-TV ARPU dropped 6% or S$3 y-o-y to S$48 as a result of promotional offers to drive migration of existing cable subscribers to IPTV.
• Residential Broadband: Stable operations. StarHub gained 13,000 broadband subscribers in 1Q19 while broadband ARPU fell S$1 q-o-q to S$31. Broadband revenue grew 3% q-o-q (flat y-o-y) at S$47.1m.
• 1Q19 EBITDA and service EBITDA margin was higher at S$155.6m (+2% y-o-y; +41% q-o-q) and 33.7% (1Q19: 31.7%; 4Q18: 23.1%) respectively. This was due to the impact of SFRS(I) 16 Leases where operating lease are now capitalised as assets and amortised over the asset life. Excluding the impact of SFRS(I) 16, service EBITDA margin for 1Q19 would have been 30% (1.7% lower than 1Q19).
• 1Q19 net profit was adversely impacted by higher opex from Ensign which resulted in operating losses of S$11.4m from cyber security services vs a net profit of S$5.1m in 1Q18. Together with higher depreciation, higher finance expenses and higher effective tax rate, 1Q19 core net profit fell 14% y-o-y to S$54m. Sequentially, net profit rose 16% q-o-q on the back of a 23% decline in staff cost, marketing and promotional activities and allowance for doubtful debt. To recap, 4Q18 saw a one-off provision for staff benefit in order to rationalise and retain talent.

EARNINGS REVISION/RISK

• Maintain 2019 net profit of S$206m.
• For full-year 2019, management guides for:
  1. stable to 2% y-o-y decline in service revenue,
  2. service EBITDA margin between 30-32%;
  3. capex commitment of 11-12% of total revenue, and
  4. quarterly dividend of 2.25 S cents for 2019 or at least 80% of net profit (whichever is greater).

VALUATION/RECOMMENDATION

• Maintain SELL with a DCF-based target price of S$1.45 (COE: 8.75%; terminal growth: 0%).
• We are cautious on StarHub as we believe it will be adversely affected by the entry of TPG as the fourth mobile operator. Mobile accounted for 35% of its service revenue in 2018. We expect competition and price erosion to worsen post entry of TPG.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2019-05-06

SGX Stock Analyst Report SELL MAINTAIN SELL 1.450 SAME 1.450