StarHub - Phillip Securities 2019-11-06: Recovery Underway

STARHUB LTD (SGX:CC3)

StarHub - Recovery Underway

STARHUB LTD (SGX:CC3)'s 3Q19 revenue and NPAT met expectations. Excluding S$9mn one-off tunnel income from TPG, NPAT would have missed our estimates by 3%. See StarHub Announcements.
Mobile segment relatively resilient considering competition and substantial churn from single enterprise customer.
Enterprise revenue grew 16% y-o-y boosted by cyber-security which spiked 135% y-o-y.
Expect pay-tv business to stabilise in FY20e due to steadier subscriber base.

Maintained ACCUMULATE with an unchanged Target Price S$1.58. No changes to our estimates.

Pay-tv revenue is down 25% y-o-y, ARPU has gone through an 18% decline to cope with the attrition of subscribers to Over-The-Top (OTT) players. We think StarHub has hit the bottom of subscriber attrition accelerated by the cable to fibre migration exercise. We expect stability as newly converted subscribers are locked into a 2-year contract. We also expect ARPU to improve with time as promotional initiatives expire.
Management highlighted that majority of its content costs have been renegotiated to a variable cost model, and will not hesitate to substitute content which insists to be on a fixed cost model. As of 3Q19, pay-tv contributed to 10% of total revenue.

The mobile segment did relatively well considering the highly competitive environment and the huge churn it received this quarter. Post-paid subscriber declined by 35,000 q-o-q due to single enterprise customer exiting the market. Mobile service revenue declined 11% y-o-y/ 1% q-o-q vs our estimate (-14% y-o-y/ -4% q-o-q).
We view the earlier commercial launch of TPG Telecom (TPG) to provide more visibility for the market as it removes uncertainty.

Management revised FY19e service revenue guidance downwards from 0% to -2% y-o-y, to -2% to -3% y-o-y; and reduced CAPEX commitment guidance from 11%-12% to 8%-9% of total revenue. STARHUB expects single-digit CAPEX for 4G (maintenance) and double-digit CAPEX for the upcoming 5G roll-out.
3Q19 results were boosted by an exceptional S$9mn on tunnel fee from TPG. These fees are recognised when TPG enters into an agreement with the other Mobile Network Operators (MNOs) to share the cost of existing 4G tunnel infrastructure. 60% of the cost programme initiatives have been executed, current net savings stands at S$174mn, and the remaining S$36mn has been reinvested into the business.
We expect the cyber-security business and sale of equipment to offset weakness in the consumer segment for the next quarter.

Our valuation is based on a 6X EV/EBITDA. We are awaiting sustainable profits of the cyber-security business before making any meaningful upgrades. See StarHub Share Price; StarHub Target Price.

Alvin Chia Phillip Securities Research | https://www.stocksbnb.com/ 2019-11-06

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.580 SAME 1.580