StarHub - Maybank Kim Eng 2019-08-07: In Line At The Core


StarHub - In Line At The Core

No pain no gain; maintain contrarian BUY

  • STARHUB LTD (SGX:CC3)'s 1H19 profit was in line with MKE/consensus if excluding SGD12m of exceptional costs.
  • We maintain our forecasts, DCF-based (WACC 5.7%, LTG -1%) Target Price and contrarian BUY.
  • We believe the market has not fully reflected benefits from StarHub’s business and cost restructuring as investors are still awaiting signs of industry stabilisation to be confident of a bottom. Irrational competition in even the enterprise arena is the key risk to the outlook for the sector.

Weak at face value…but in line on examination

  • StarHub reported 1H19 profit of SGD88.7m fell steeply by 30% y-o-y and achieved only 46%/47% of FY19 MKE/consensus estimates. But management disclosed exceptional start-up costs for its new cyber security arm and cable-to-fibre migration. If we strip out these expenses, 1H19 core profit was 52%53% of MKE/consensus estimates instead.
  • As expected, pay TV revenue continued its steep decline but content costs also fell at the same time as StarHub’s focus shifted more to a variable basis. Wireless revenues stabilised q-o-q, despite an influx of new competing brands.

Revenue guidance maintained; potential catalysts

  • Although StarHub's 1H19 service revenue–fell 3% y-o-y, management maintained its FY19 guidance of -2%. Management indicated this would come from increased momentum from cyber security, more than offsetting softness in network solutions and wireless.
  • Meanwhile, by end-Sept the last major pay TV content negotiation will take place that could complete the cost restructuring. There will no longer be start up-related costs and there will be lower migration costs disrupting reported profits.

Market repair - not soon. Acceptance comes sooner.

  • Management indicated there’s a potential influx of new wireless brands. This is on top of TPG’s (TPM AU) imminent commercial launch. As such, we think market repair does not seem forthcoming. But we believe this is largely anticipated by the market. As such, signs of stabilisation alone could drive a sector re-rating and StarHub should outperform having been the most impacted on earnings and sentiment as a pure Singapore play unlike SingTel (SGX:Z74) (HOLD, Target Price SGD3.48).

Luis Hilado Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-08-07
SGX Stock Analyst Report BUY MAINTAIN BUY 2.000 SAME 2.000