StarHub - RHB Invest 2019-08-07: Cyber Security Losses Tapering Off


StarHub - Cyber Security Losses Tapering Off

  • Maintain NEUTRAL with adjusted DCF-derived Target Price (WACC: 7.4%) of SGD1.52 from SGD1.72, 3% upside.
  • STARHUB LTD (SGX:CC3)'s 2Q19/1H19 results were broadly in line. We lower our FY19-21 core earnings forecasts by 5-12%, mainly to factor in higher financing charges and weaker pay-TV and cable revenues.
  • StarHub’s prospective EV/EBITDA valuations are at -2SD below its historical mean. Upside risks are stronger-than-expected earnings, an earlier turnaround at its enterprise business, and weaker mobile competition.

Broadly in line.

  • StarHub's 1H19 core earnings (post-SFRS 16, -25% y-o-y) made up 50-51% of our/consensus’ estimates. Core earnings fell 27% q-o-q on lower revenue (-7.5% q-o-q), weaker EBITDA margin, and losses from cyber security services.
  • A 2.25 cents 2Q DPS was declared (YTD: 4.5 cents), reflecting a payout of 99% on core EPS.

Mobility to remain under pressure.

  • Mobile service revenue (MSR) was steady q-o-q (-10% y-o-y) after two quarters of contraction, thanks to stronger postpaid net-adds (2Q19: 39,000) with contributions from mobile virtual network operators (MVNO), and its new digital brand, giga (launched in May). Postpaid ARPU recovered to SGD41 on some roaming seasonality, after having contracted for the past three quarters.
  • Management expects competition to remain intense with the raft of offerings in the market giving significant value propositions. We continue to see downside risks to mobility ARPU and revenue with more MVNOs expected to join the fray in the coming months.

Enterprise segment to breakeven by end-2019.

  • The enterprise business remains the key growth driver (+5% q-o-q, +14.5% y-o-y), largely driven by the cyber security business (+161% y-o-y, +37% q-o-q) which more than offset the decline in traditional network solutions revenue (-4.2% y-o-y, -3.4% q-o-q).
  • Positively, EBIT losses from the cyber security business trickled down to SGD0.8m from SGD11.4m in 1Q19 (several one-off costs booked).
  • Management expects the cyber security arm to breakeven by end-2019.

Cable migration to fibre extended to end-September.

  • Due to the surge in orders for fibre migration (initially targeted for completion by end-June), customers now have until end-August to register at no additional cost.
  • Management is optimistic about addressing the order backlog and expects the last of the migration cost to be reflected in 3Q19, with the amount being smaller compared to 1HFY19.

Singapore Research RHB Securities Research | 2019-08-07
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.52 DOWN 1.720