StarHub - DBS Research 2019-11-06: Negatives In The Price; Catalysts In Place 


StarHub - Negatives In The Price; Catalysts In Place 

  • StarHub's 3Q19 earnings of S$58m (+2% y-o-y, +47% q-o-q) ahead of our S$36m estimate due to higher profit from equipment sales and payment from TPG.
  • FY19F earnings lifted 6%; near term catalyst from joint bid for 5G in Jan 2020.
  • Upgrade to BUY with a higher Target Price of S$1.43 after factoring capex savings.

Good entry point with catalyst in place.

  • While STARHUB LTD (SGX:CC3)’s operating metrics remain weak, the share price may benefit from significant capex reductions over FY19/20F.
  • New entrant TPG is struggling to fulfil its network rollout obligations as reflected in TPG paying ~S$9m to StarHub in 3Q19 for in-tunnel coverage, strengthening the case for consolidation in the sector.
  • StarHub is working towards a joint bid for the nationwide 5G licence in Jan 2020, which could be a share price catalyst.
  • The stock is cheap at 14.2x 12-month forward PE, near -2SD of its mean of 13.7x, with an attractive dividend yield of 6.8%/5.5% over FY19F/ FY20F. See StarHub Dividend History.
  • Superior free cash flow may lead to higher-than-projected dividends in FY20F. Upgrade to BUY.

Earnings surprise despite weak revenue

3Q19 earnings of S$58m (+2% y-o-y, +47% q-o-q) came above our estimate of S$36m.

  • StarHub's 9M19 earnings came in at 90%/88% of ours and consensus expectations. The earnings surprise in 3Q19 stemmed from two key sources:
    • S$9m payment made by TPG for the use of in-tunnel equipments of the incumbent mobile operators – TPG is required to make payments for the use of in-tunnel radio equipment laid out by the incumbent operators in order to meet 99% road tunnel coverage requirement by 1 January 2020 as set out by the IMDA.
    • higher than expected handset profit of S$17.7m recognised 3Q19. This may be due to StarHub offering lower retention bonus and subsidies compared to those offered in 1Q19.
  • As a result, 3Q19 EBITDA expanded 16% y-o-y (+16% q-o-q) to S$170.5m despite a 2% y-o-y drop (in total revenue. Depreciation and amortisation expenses increased 2% q-o-q owing to higher amortisation attached to recent acquisitions.
  • See StarHub Announcements; StarHub Latest News.

9M19 service revenue of S$1,321m (-3.9% y-o-y) was marginally below our expectations of 3% drop.

  • StarHub reported y-o-y declines across all business segments, except enterprise which reported healthy growth of 15% y-o-y in 9M19. Enterprise services reported 9M19 revenues of S$420m with cyber security services contributing to majority of the growth. Mobile service revenues declined 8.8% y-o-y in 9M19, below our expectations of a 7% drop, largely driven by continued migration towards SIM-Only offerings, dragging postpaid ARPU down by 10% in 9M19. StarHub lost 35,000 postpaid subscribers during the quarter as an enterprise customer in the hospitality segment wound up operations.
  • Pay TV revenues dropped 20% y-o-y in 9M19, driven by subscriber losses during the cable migration process, which came to an end in 3Q19. StarHub still lost ~27,000 subscribers in 3Q19 (76,000 in 9M19) while cable TV ARPU continued to worsen dipping 9% q-o-q (-13% in 9M19). StarHub however mentioned that its cable TV subscriber base is expected to be stable going forward without major churn and that the subscribers that have migrated are on 2-year contracts. Broadband also witnessed a marginal 3% y-o-y contraction in the topline during 9M19, despite higher subscriber additions as StarHub rolled out aggressive promotions to facilitate the uptake of StarHub’s offers to migrate. 9M19 service revenue came in at 74% of our expectations.

Cost transformation programme on-track with ~60% of cost savings already secured.

  • StarHub revealed that ~60% of its S$210m cost transformation plan (S$126m cost savings) has already been executed with bulk of the savings (~39%) stemming from the staff reduction exercise executed in 2018. Cost savings from cable TV operations, primarily via reduction in the cost of content contributed ~18% while other operational efficiencies accounted for ~3% of savings. StarHub has reinvested ~17% of the savings realised back into the business, primarily for digitisation and investments in cyber-security, rendering net cost savings of ~S$105m. The remaining 40% is expected to be accrued over FY20-21 primarily through operational efficiencies realised via digitalisation and further streamlining of StarHub’s cable TV operations.

Capex guidance lowered with the shift in capital to more profitable business segments.

  • StarHub revised its FY19F capex guidance to 8-9% of total revenue from 11-12% of revenue previously as it diverts capital towards the fast-growing fixed services segment by limiting investments in cable TV and broadband segments.
  • Going forward StarHub would expand the usage of NetLink NBN Trust (SGX:CJLU)’s fibre to serve enterprise customers rather than pulling its own fibre. StarHub is also optimsing its 4G rollout given that 5G would be available in certain areas from 2021 onwards.

Raised FY19F earnings by 6%.

  • We raised our FY19F earnings by 6% to reflect payments from TPG for in-tunnel equipment usage and higher than expected handset profit in 3Q19. We believe payments from TPG for in-tunnel usage might recur over the next 2-3 quarters altough the magntude will decrease as TPG incrementally installs its own equipments gradually.


  • Upgrade to BUY with a higher Target Price of S$1.43. We value StarHub at 6.0x EV/FY20F EBITDA, which is at a ~15% discount to the regional average of 7.2x, and derive a higher Target Price of S$1.43 (from S$1.30) as we factor in capex savings. See StarHub Share Price; StarHub Target Price.

Where we differ:

  • Our FY19F/20F earnings are now in line with street estimates. We raised FY19F earnings to reflect payments from TPG for usage of in-tunnel equipment and higher profit from equipment sales

Potential catalyst:

  • Joint bid for nationwide 5G licence - A joint bid with another major telecom operator for the nationwide 5G licence in Jan 2020 could rekindle interest in the stock.

Sachin MITTAL DBS Group Research | 2019-11-06
SGX Stock Analyst Report BUY UPGRADE HOLD 1.43 UP 1.300