StarHub - UOB Kay Hian 2019-08-07: 2Q19 Below Expectations, Competition From MVNOs Dampens Mobile Revenue

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STARHUB LTD (SGX:CC3)

StarHub - 2Q19 Below Expectations, Competition From MVNOs Dampens Mobile Revenue

• STARHUB LTD (SGX:CC3)’s 2Q19 core net profit declined to S$39.5m (-36% y-o-y, -27% q-o-q). This reflects:
  1. heightened mobile competition with the entry of MVNOs,
  2. higher cable migration costs – one-off in 1H19, and
  3. S$0.9m losses from the cyber security business.
• Results are in line with street but below our expectations. We cut our 2019 net profit forecast by 11% to reflect S$7m cable migration costs and higher cyber security expenses.
• We remain cautious with a DCF-based target price of S$1.45. Maintain SELL.

2Q19 RESULTS

In line with consensus, below our estimate.

• STARHUB LTD (SGX:CC3) reported a lower 2Q19 revenue and net profit of S$553m (-8% y-o-y, -7% q-o-q) and S$39m (-36% y-o-y, -27% q-o-q) respectively, on the back of S$0.9m losses from cyber security services and higher cable migration costs.
• Annualised 1H19 net profit of S$93.5m (-25% y-o-y) is below our expectation but in line with street estimates. The discrepancy on our end stemmed from higher-than-expected cable migration costs (1H19: S$7m).
• StarHub declared a 2.25 S cents cash dividend for 2Q19. We expect the group to pay out 9 S cents DPS for 2019, translating to a dividend yield of 6%. See StarHub's dividend history.

STOCK IMPACT

• Mobile service revenue in 2Q19 fell 10% y-o-y (flat q-o-q) on the back of lower IDD, voice, data usage and value-added-services (VAS) revenues. We note competition intensified in 2Q19 with the entry of mobile virtual network operators (MVNO), including StarHub’s SIM- only GIGA sub-brand. StarHub holds 26% of Singapore's mobile market as of Jun 19.
• Post-paid customer base in 2Q19 rose by 101,000 or 7% y-o-y to 1.477m subscribers. ARPU fell to S$40/month (2Q18: S$45/month) given lower voice and data usage. Overall, the average smartphone data usage increased to 7.5GB in 2Q19 vs 5.5 GB in 2Q18.
• Prepaid customer base fell 93,000 or 11% y-o-y as a result of continuous pre-to-postpaid conversions. ARPU was firm at S$14 vs S$13 in 2Q18.
• Enterprise Fixed: Delivered double-digit revenue growth. Enterprise fixed revenue rose 15% y-o-y and 5% q-o-q to S$140m. This was mainly driven by higher cyber security business revenue and higher international voice traffic usage.
• Pay-TV: As expected, migration to fibre led to higher customer churn of 2% vs 1% in 2Q18. StarHub lost 20,000 subscribers in 2Q19, likely to competitors as a result of the on-going cable to fibre migration programme. Pay-TV ARPU dropped 17% or S$9 y-o-y to S$44 as promotional offers were needed to drive migration of existing cable subscribers to Internet Protocol Television (IPTV).
• Residential broadband: Encouraging parameters. StarHub gained 14,000 broadband subscribers q-o-q. ARPU fell S$2 sequentially to S$29 given more promotional activities.
• 2Q19 EBITDA contracted 6% y-o-y and 10% q-o-q to S$146m. Management remains committed to saving S$210m over 3 years and is on track to deliver specific cost savings (to be disclosed in 3Q19). Service EBITDA margin in 2Q19 was at 31.8% vs 33.7% in 1Q19 as a result of higher expenses from the cyber security business.
• All in all, 2Q19 net profit was adversely impacted by:
  1. heightened mobile competition with the entry of MVNOs,
  2. market share loss given the ongoing pay-tv migration programme,
  3. higher cable migration costs, and
  4. S$0.9m cyber security losses (2Q18: S$4.1m).
• Management guided for both higher costs relating to cyber security and fibre migration in the quarter to be one-off expenses, and do not expect it to recur for the coming quarters.

EARNINGS REVISION/RISK

• Cut 2019/20/21 net profit forecasts by 11%/6%/7% on the back of a lower subscriber base of prepaid subscribers, the pay-tv migration programme and higher costs associated with cyber security and fibre migration in 1H19.
• For the full-year of 2019, management guided for:
  1. stable or 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 remain cautious on StarHub's near-term outlook given:
  1. loss of market share due to the pay-tv migration programme, and
  2. competitive pressure in the mobile segment.
• StarHub 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/ 2019-08-07

SGX Stock Analyst Report SELL MAINTAIN SELL 1.450 SAME 1.450