StarHub - DBS Research 2019-10-23: Wait For Earnings To Stabilise


StarHub - Wait For Earnings To Stabilise

  • Cost Savings may not be enough to offset ~S$90m drop in STARHUB (SGX:CC3)’s combined Mobile & Pay-TV revenue in FY20F; Our FY19F/20F earnings are 5%/2% below street’s.
  • StarHub Share Price may see a short-lived rally if a joint bid for 5G is announced in January 2020.
  • Maintain HOLD call with a lower Target Price of S$1.30.

StarHub’s share price is likely to remain range-bound till earnings stabilise.

Cost savings insufficient to stabilise earnings

  • We estimate STARHUB (SGX:CC3)’s underlying earnings to dip ~23% over FY20F (20% h-o-h decline over 1H19), driven by ~S$110m decline in Mobile and Pay-TV service revenues, expenses attached to the migration exercise partially offsetting savings on Pay-TV content costs and Cyber-Security losses in 1Q19.
  • We project underlying earnings to record a milder decline of 6% over FY20F, driven by ~S$90m drop in Mobile and Pay-TV service revenue, partially offset by cost savings on operating lease expenses, absence of migration expenses and other cost savings initiatives.
  • We do not expect StarHub’s topline to see a major turnaround till FY21F. FY21F, however, is likely to see lower earnings too, driven by potentially higher amortisation expenses on the 700MHz spectrum. Whilst the fixed line segment continues to expand, partially offsetting declines in mobile and Pay-TV revenues, we do note that the bulk of growth in this segment is driven by the Cyber-Security segment which still remains EBIT negative.

We trim our FY19/20F earnings forecasts by 15%/20%.

  • We trim our FY19F earnings by 15% in view of expenses attached to the migration exercise including one-off migration costs of ~S$10m and higher than expected contraction in Pay-TV revenues. The on-going migration exercise accelerated subscriber losses for StarHub, leading to ~18% decline in StarHub’s Pay-TV revenues over 1H19 which is much higher than our previous projection of a low-double digit decline.
  • We trim our FY20F forecasts by 20% as we now project the cost savings StarHub was set to accrue via operating lease costs and lower Pay-TV content, would not be sufficient in view of higher than expected Pay-TV losses and on-going investments in Cyber-security.

Cost Savings and updates

StarHub to report additional S$15-25m lease cost savings in 2020.

  • StarHub adopted Singapore Financial Reporting Standard 16 (SFRS 16) in 2019, which required the classification of operating leases as “Right of Use” assets in the balance sheet. Accordingly, StarHub classified the part of the Hybrid Fibre Coaxial (HFC) network it uses to provide broadband and Pay-TV services, from Singtel under Right of Use Assets in its balance sheet.
  • However, with the migration of all subscribers on the HFC Cable network to Next Generation Nationwide Broadband Network (Next Gen NBN) completed, StarHub would be terminating the agreement with Singtel for the lease of the HFC Cable network from April 2020, rendering estimated cost savings of ~S$15-25m via a decrease in StarHub’s depreciation expense. This, however, may not be enough for StarHub to stabilise its earnings in our estimates.

M1 and StarHub likely to collaborate on the nationwide 5G network roll-out.

  • StarHub has been keen on inking a network-sharing deal with M1 since 2017, which was delayed due to challenging operating conditions in the mobile market and change in the ownership structure of M1. The launch of 5G in 2020 in Singapore could be a potential catalyst for a network-sharing deal with another telecom operator for StarHub, in our view. With only two nationwide 5G network licences up for grabs, we believe that StarHub, as the second biggest operator in terms of subscribers, is likely to be a contender for one of the two licences, most likely via a tie-up with another telecom to share the capex of the 5G network roll-out. However, we are not ruling out the possibility of Singtel opting to partner with another telco for the roll-out either.
  • We believe the announcement of a potential network sharing deal by StarHub might rekindle interest in the counter among investors, factoring in the 5G capex savings StarHub is likely to accrue through a deal of this nature. However, such an uplift might be short-lived given the lack of clarity around StarHub’s path towards earnings stabilisation.

More cost savings likely over the next 3-4 quarters.

  • StarHub has announced plans to save as much as S$210m on a gross basis over 2019-2021. StarHub has already realised some staff cost savings as part of this initiative, having laid off ~300 of its fulltime staff members in 4Q18. StarHub mentioned that it hopes to realise more cost savings going forward, through ongoing digital, IT and retail transformation programmes, details of which will be shared over 3Q19. StarHub is looking to cut down its brick-and-mortar store footprint and develop its online sales channels which are already gaining momentum with the popularity of brands like Giga!. StarHub is also undergoing an IT transformation programme, which should help it realise some cost savings through efficiency gains in the near term.

Payment for the 700 MHz spectrum might be delayed even further.

  • The S$282m payment for the 700 MHz spectrum acquired in 2017 is unlikely to be incurred over FY19F and might be delayed even beyond FY20F, according to StarHub’s
  • management. This is caused by delays in Indonesia handing over the 700MHz spectrum which the country uses for Analogue transmissions. With the Analogue switch-off in Indonesia expected to take place over mid-2020, and considering the 6-month notice period IMDA (Info-communications Media Development Authority) is expected to provide Mobile Network Operators, the payment is likely to be delayed beyond FY20F. StarHub along with other industry partners are in discussions with the IMDA for the introduction of a staggered payment structure to help spread out the cash-flow burden of the spectrum payment. Conservatively, we expect StarHub to spread out the S$282m payment over two years, starting from FY20F.

StarHub’s Segmental Outlook

Mobile Segment

  • StarHub’s Mobile services revenue contracted 7.7% y-o-y in 1H19 – slightly below our expectations of 7%. StarHub’s Mobile services revenue contracted 7.7% to S$385m in 1H19 despite higher subscriber additions, as the bulk of the subscriber additions were on cheaper SIM-only packages like the recently launched Giga! and subscribers recognised from Mobile Virtual Network Operator (MVNO) partners. StarHub’s revamped Hello! Mobile plans, which offered much bigger data quotas, also weighed on ARPU, causing it to dip 10% over 1H19, with lower charges on excess data usage.
  • Mobile revenues unlikely to stabilise till FY21F. We expect StarHub’s mobile revenues to contract by 6.7%/7.3% over FY19/20F with heightened competition from incumbents and SIM-only migrations continuing at an accelerated pace over the near term. In our opinion, StarHub’s mobile segment is unlikely to see better days till FY21F. We expect StarHub’s mobile sector to post a lower decline over FY21F, driven by:
    • Potential merger of TPG with one of the incumbents or a complete exit from the Singapore market;
    • Peaking of SIM- only subscribers leading to lower SIM-only migration; and
    • Potential launch of 5G-related service offerings.

Pay-TV and Broadband segments

  • Pay-TV woes amplified by ongoing fibre migration. StarHub Pay-TV revenues dipped 18% y-o-y over 1H19 with steep subscriber losses and declines in ARPU. About 35,000 subscribers (~9% of StarHub’s 4Q18 Pay-TV subscriber base) withdrew from Pay-TV services over 1H19, largely driven by the ongoing fibre migration. According to the management, during the migration, a large portion of the customers who were not using Pay-TV services on a frequent basis decided to cancel their Pay-TV subscriptions. Broadband revenues also recorded a decline of 1.2% over 1H19 despite subscriber additions, as StarHub continued to run promotions and discounted service offerings in a bid to attract existing subscribers to migrate to fibre and attract new subscribers to the fibre service.
  • Future of Pay-TV to be a variable on-demand structure. StarHub expects to convert its presently loss-making Pay-TV segment to a variable Netflix-like content model. The telco is already in negotiations with major content providers to convert the current payment structure for content from a fixed to a variable cost structure. According to the company, some of the major renegotiations are expected to be finalised by 3Q19.
  • StarHub also expects to revamp the current revenue model for the Pay-TV segment, with customers paying for content on a variable basis as per consumption as opposed to the monthly fixed-fee structure in place currently.
  • The outlook for Pay-TV remains challenging in the medium term. Broadband likely to remain stable. We expect StarHub’s Pay-TV revenues to dip by 18%/13% in FY19/20F led by further declines in the subscriber base and ARPU. While we expect StarHub to turn around its Pay-TV segment over FY20/21F with the introduction of a variable cost and a revenue model, we expect further declines in the Pay-TV top line as ARPU is likely to continue to decline with customers moving away from a monthly fixed fee to a variable pay-per content model. Broadband revenue, on the other hand, should follow a more stable trajectory, led by a stable subscriber and ARPU profile.

Fixed Services segment

  • Cyber-security broke even at EBITDA level in 2Q19 but losses likely to persist in the near term. StarHub’s cyber-security segment recorded a positive EBITDA of S$3.2m in 2Q19 with the absence of one-off expenses recognised in1Q19, which had sent 1Q19 cyber-security EBITDA loss to S$5.1m. However, the segment still remains loss-making at an EBIT level and StarHub’s management expects cyber-security operations to remain EBIT negative in the near term as StarHub looks to expand its service offerings beyond Singapore to Malaysia and Hong Kong.
  • StarHub’s cyber-security portfolio includes cyber-security consulting and managed security service solutions, services that tend to be opex-heavy and opex-frontloaded with the need for cyber-security professionals, while revenues from these services tend to be recognised over the life of the contract, which typically extends over a year. Although StarHub is looking to ramp up its cyber-security operations, we believe cyber-security would not contribute in a meaningful manner to StarHub’s bottom line over the next 3-4 quarters.
  • Enterprise sector to expand 14/11% over FY19/20F led by cyber-security. Resumption of government contracts and absence of major contract renewals to further support growth. We project StarHub’s enterprise segment to expand 14/11% y-o-y over FY19/20F, led by improvements in StarHub’s cyber-security business. Growth over FY20F would largely depend on the acceleration of Smart Nation government contracts, acquisition of new corporate contracts (~85-88% of the market is not catered to by StarHub and the company sees ample room to improve its market share) and the absence of large-scale managed services contracts over FY20F (the bulk of corporate contracts span over a year). We expect the enterprise sector to expand ~11% over FY20F, backed by cyber-security and high single-digit growth in managed service solutions.

Where we differ: our FY19F/20F earnings are 5%/2% below street estimates.

  • Street earnings are likely to be revised down post 3Q19F, driven by further shrinkage of Pay TV revenues, higher fibre migration costs and continued woes in the mobile segment.
  • See StarHub Target Price; StarHub Analyst Reports.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-10-23
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.30 DOWN 1.550