StarHub 3Q19 - UOB Kay Hian 2019-11-06: Within Expectations, Focus On Near-term Cost Efficiency

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STARHUB LTD (SGX:CC3)

StarHub 3Q19 - Within Expectations, Focus On Near-term Cost Efficiency

• StarHub's 3Q19 core net profit (excluding S$9m tunnelling fees from TPG) came in at S$49m (- 14% y-o-y, +24% q-o-q). Sequential growth was driven by higher equipment sales, higher enterprise revenue and cost savings. 9M19 net profit of S$142m accounts for 77% of our full-year forecast, in line with expectations.
• StarHub will focus on driving near-term operational efficiency.
• Upgrade to HOLD as the stock trades at -2SD below its mean EV/EBITDA. Target price remains unchanged at S$1.45. Entry price: S$1.25.

3Q19 RESULTS

Within expectations.

• STARHUB (SGX:CC3) reported 3Q19 core net profit of S$49m (-14% y-o-y, +24% q-o-q) on the back of:
  1. higher equipment sales,
  2. higher cyber security income; and
  3. lower staff and traffic costs.
• This was partly offset by an 11% y-o-y and 1% q-o-q decline in mobile service and lower pay-TV revenue due to the completion of cable-to-fibre migration on 30 Sep 19. 9M19 core net profit of S$142m (-22% y-o-y) accounts for 77% of our full-year forecast, in line with expectations. See StarHub Announcements; StarHub Latest News.
• The group has declared a 2.25 S cents cash dividend for 3Q19, bringing 9M19 net DPS to 6.75 S cents. This translates to a net dividend yield of 6.8%. Full-year guidance is maintained at 9 S cents. See StarHub Dividend History.

STOCK IMPACT

Mobile service revenue in 3Q19 fell 11% y-o-y

• Mobile service revenue in 3Q19 fell 11% y-o-y and 1% q-o-q on the back of lower voice, data usage, value-added services (VAS) revenues, and heightened mobile competition with the proliferation of mobile virtual network operators (MVNO). StarHub’s market share slipped to 25.1% in 3Q19 (3Q18: 26.7%).
• Postpaid mobile added 57,000 customers. StarHub added 35,000 postpaid customers to 1.442m (+4% y-o-y). Postpaid ARPU fell to S$39 vs S$44 in 3Q18 as a result of SIM-only postpaid plans. The average smartphone data usage continued to surge to 8.8GB in 3Q19 vs 5.9GB in 3Q18.
• Prepaid mobile customer base contracted 6% y-o-y due to continuous pre-to-postpaid conversions. Prepaid ARPU declined marginally to S$13 vs S$14 in 3Q18.

Enterprise business: Delivered double-digit revenue growth.

• Enterprise revenue grew 17% y-o-y and 4% q-o-q to S$146m, driven by higher cyber security revenue and higher managed service revenue. Ensign remains loss-making at S$3.7m due to its heavy opex business nature.

Pay-TV: Higher customer churn as fibre migration completed.

• To recap, StarHub has completed cable migration programme at end-Sept 19. In 3Q19, subscriber base shrunk by 76,000 while pay-TV ARPU declined 15% or S$7 y-o-y to S$40 as promotional offers were needed to attract new customers and to retain cable customers to switch to fibre.

Good cost discipline and SFRS 16 impact

• Good cost discipline and SFRS 16 impact boosted 3Q19 EBITDA to S$171m (+16% y-o-y, +17% q-o-q), underpinned by:
  1. ongoing operational efficiency strategy that drove a 16% y-o-y decline in staff cost,
  2. lower pay-TV content cost - successful contract renegotiations,
  3. lower traffic expenses (-49% y-o-y) on lower traffic volume, and
  4. the impact of SFRS 16 that led to a lower operating lease expenses but higher depreciation.

Cost savings of S$210m in three years.

• Broadly, management remains committed to saving around S$210m over three years. To date, StarHub has achieved 60% of the total cost savings. Notably, 40% of the cost savings was attributable to StarHub’s workforce optimisation efforts.

EARNINGS REVISION/RISK

No changes to earnings.

• Management has revised downward its full-year capex guidance to 8-9% of total revenue (from 11-12%) as the competitive landscape and the shift towards 5G technological cycle cap near-term 4G investments. This excludes S$282m of 700MHz spectrum (available in 12-18 months) spending. StarHub sees capex doubling if the company is awarded 5G nationwide spectrum.
• Management has also revised downward service revenue for 2019 to 2-3% decline (earlier guidance: stable to 2% y-o-y decline), but maintained:
  1. service EBITDA margin between 30- 32%, and
  2. quarterly dividend of 2.25 S cents for 2019 or at least 80% of net profit (whichever is greater).

5G: A consortium to lower capex burden.

• StarHub is keen on a partnership with other mobile network operators (MNOs) to jointly bid for a nationwide 5G network provider. The company is in the midst of discussions with the MNOs, and believes that network consolidation would result in massive capex and opex savings, as well as the creation of a more reliable network.

VALUATION/RECOMMENDATION

• Upgrade to HOLD with an unchanged target price of S$1.45 (COE: 8.8%; terminal growth: 0%), or 5.4x EV/EBITDA. See StarHub Share Price; StarHub Target Price.
• At our target price, the stock will trade above -2SD of 5-year EV/EBITDA of 5x. Entry price is S$1.25. Whilst near-term competition persists, StarHub’s cost efficiency and potential 5G leap will set the group on a stronger footing to capture revenue growth in the medium term (beyond 2021).

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2019-11-06

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