StarHub - CGS-CIMB Research 2019-08-07: Earnings Drag From Competition To Persist


StarHub - Earnings Drag From Competition To Persist

  • STARHUB LTD (SGX:CC3)'s 2Q19 results beat expectations but we expect weaker 2H19. DPS was in line.
  • Mobile, pay TV and broadband revenues fell y-o-y again; fixed enterprise up.
  • Maintain HOLD with an unchanged DCF-based target price of S$1.65.

2Q19 results a beat but weaker 2H19F likely; 2.25 Scts DPS in line

  • STARHUB LTD (SGX:CC3)'s 2Q19 EBITDA rose a marginal 0.4% y-o-y (-9.4% q-o-q) due to the adoption of SFRS 16. Without the positive SFRS 16 effects, core EPS shed 21.7% y-o-y (-27.4% q-o-q), mainly due to lower service revenue and cost incurred to migrate cable subs to fibre.
  • 1H19 EBITDA/core EPS accounted for 61.7%/70.1% of our FY19F forecasts (Bloomberg consensus: 53.6%/55.9%). While this is tracking above expectations, we expect 2H19F earnings to weaken.
  • StarHub's 2Q19 DPS was in line at 2.25 Scts (2Q18: 4 Scts).

Lacklustre mobile and pay TV revenues

  • Mobile service revenue continued to fall 9.9% y-o-y in 2Q19 (flat q-o-q) due to lower IDD/voice/excess data usage, higher amortisation of subsidies and greater take-up of SIM-only plans. Q-o-q, postpaid subs grew 2.7%, on top of a 2.6% gain in ARPU.
  • Pay TV revenue dipped by a sharper 23.6% y-o-y (-8.5% q-o-q) due to lower subs and ARPU.

Broadband fell y-o-y; resilient fixed enterprise growth

  • StarHub's 2Q19 broadband revenue inched lower by 2.2% y-o-y (-4.2% q-o-q) on 9.4% y-o-y (-6.5% q-o-q) lower ARPU. q-o-q, subs continued to grow, up a decent 14k q-o-q (+2.8% q-o-q).
  • Meanwhile, fixed enterprise revenue climbed 14.5% y-o-y (+4.6% q-o-q), stemming from growth in managed services (cybersecurity) and voice.

Service EBITDA margin widened y-o-y, largely from SFRS 16

  • Service EBITDA margin was up 1.7% pt y-o-y (-1.9% pt q-o-q) to 31.9% in 2Q19, mainly due to the adoption of SFRS 16 since Jan 2019 (which reclassifies operating leases as financial leases), lower content (contract renegotiations), device and staff costs.

Maintain Hold; DCF-based target price unchanged at S$1.65

  • Maintain HOLD. Our target price is still based on a 10% discount to our DCF-based fair value of S$1.84 (WACC: 7.1%) on a lack of near-term earnings catalysts, in our view.
  • StarHub’s 17.5x FY20F EV/OpFCF is at a 14% premium to the ASEAN telco average.
  • Upside/downside risks: less-/worse-than-expected negative impact from TPG’s entry.

FOONG Choong Chen CFA CGS-CIMB Research | 2019-08-07
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.650 SAME 1.650