StarHub - DBS Research 2019-08-07: Cyber-security To The Rescue In 2Q19. Await Better Clarity To Enter


StarHub - Cyber-security To The Rescue In 2Q19. Await Better Clarity To Enter

  • STARHUB LTD (SGX:CC3)'s 2Q19 net profit of S$39.5m (-27% q-o-q, -37% y-o-y) was in line with our expectations.
  • Fixed network solutions, once the driver of growth for StarHub, declined for second consecutive quarter.
  • Cyber-security security is the only segment growing but is a razor thin-margin business if profitable.
  • Maintain HOLD with a Target Price of S$1.55.

What’s New

2Q19 earnings of S$39.5m (-27% q-o-q, -37% y-o-y) was in line with our expectations.

  • Earnings were primarily driven by lower losses in the cyber-security segment. Cyber-security losses narrowed to S$0.8m over 2Q19 vs. a loss of S$11.4m in 1Q19, with the absence of one-off costs pertaining to the formation of the Ensign joint venture and set-up costs recognised over 1Q19.
  • Operating expenses including depreciation and amortisation dipped 8% y-o-y, largely driven by staff cost savings accrued through StarHub’s cost transformation programme. 1H19 earnings accounted for ~51% of our forecast for FY19F.

2Q19 service revenue of S$442m (-0.4% q-o-q, -5.2% y-o-y) was driven by the cyber-security segment.

  • StarHub reported y-o-y declines across all business segments, except cyber-security which reported a healthy q-o-q growth of 37% to partially offset declines across other segments. Fixed network solutions business dipped 4% y-o-y (-3% q-o-q), the second consecutive quarter of y-o-y decline, owing to the renegotiation of expiring corporate contracts at lower prices.
  • StarHub also cited the absence of certain government contracts as a reason for the fixed services segment falling short of expectations. Robust growth in the cyber-security segment propelled growth in fixed services, leading to a 15% y-o-y expansion in the segment.
  • Mobile service revenues dipped 9.9% y-o-y to S$192m (steady q-o-q) with bulk of subscriber additions on cheaper SIM-Only packages like the recently launched Giga! and subscriber additions via Mobile Virtual Network Operator (MVNO) partners.
  • Cable revenues dipped 24% y-o-y (-8% q-o-q), with continued subscriber losses and dilution of ARPU from the ongoing migration of subscribers from the Hybrid Fibre-Coaxial to the Next Generation Nationwide Broadband (Next Gen NBN) fibre network.
  • Broadband also witnessed a marginal 2% y-o-y (-4% q-o-q) contraction in the top line, despite subscriber addition. Broadband ARPU dipped 9% y-o-y (-6% q-o-q), largely due to low-priced promotional offerings to drive up the uptake of StarHub’s migration offer to fibre.
  • With a 15% dip in equipment revenue, StarHub reported total revenues of S$553m (-7% q-o-q, -7% y-o-y), in line with our expectations. 1H19 revenues represent ~50% of our FY19F forecast.

Fibre migration on track and would be completed by September.

  • Cyber-security losses to be sustainable going forward. StarHub is on track to complete the ongoing fibre migration programme by September, according to the management. StarHub has already recognised ~S$7m one-off charges pertaining to the migration over 1H19, on top of higher marketing and discounts offered to entice subscribers to migrate.
  • StarHub’s management also stated that the cyber-security segment is seeing robust growth and is expected to accelerate towards the latter part of the year driven by both domestic and regional demand. Despite acceleration of revenue, StarHub expects cyber-security losses to be sustainable and not bounce back to the levels seen over 1Q19.

Wait for better clarity on recovery

  • StarHub is seemingly heap after a 15% YTD contraction, trading at a 12-month Forward EV/EBITDA and PE of 6.6x and 13.6x respectively, near -2SD on both metrics. However, StarHub’s only growth engine, the fixed network solutions segment is now contracting due to tight price competition. Cyber-security, which is presently loss-making and may not materially contribute to the bottom line in the near term, is the only segment that is expanding.
  • Besides, StarHub may not record tangible savings from its ongoing cost transformation programme either as those savings are re-invested in the business.
  • While StarHub offers an attractive 6% FY19F yield, the sustainability of the current yield remains questionable with ongoing pressure on the bottom line, ~S$282m payment due over FY20F for the 700MHz spectrum and high leverage of 1.64x net debt to trailing twelve month EBITDA. See StarHub's dividend history.

Maintain HOLD with a Target Price of S$1.55.

  • We maintain our 12-month Target Price of S$1.55 valuing StarHub at 6.6x FY19F EV/EBITDA and reiterate our HOLD call on the lack of clarity over a sustained recovery of StarHub.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-08-07
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.550 SAME 1.550