StarHub - RHB Invest 2019-11-06: Executing On Cost Savings


StarHub - Executing On Cost Savings

  • Maintain NEUTRAL with new DCF-based Target Price of SGD1.44 from SGD1.52 (WACC: 7.4%), 8% upside plus 7% dividend yield. See StarHub Share Price; StarHub Target Price.
  • STARHUB (SGX:CC3)'s 9M19 results (post- Singapore Financial Reporting Standard (SFRS) 16 beat expectations due to stronger-than-expected EBITDA. We roll forward our forecast base year to FY20 with +6%, -9%, -10.2% house-keeping adjustments to FY19F-21F core earnings.
  • While valuations are at 2SD below historical EV/EBITDA mean, re-rating catalysts are scant.
  • Key downside risks are competition and higher-than-expected 5G capex.

3Q19 earnings (post-SFRS16) jumped 46.8% q-o-q

  • STARHUB (SGX:CC3)'s 3Q19 earnings (post-SFRS16) jumped 46.8% q-o-q (+2% y-o-y), mainly from stronger EBITDA from its cost optimisation programme (70% of targeted SGD210m realised YTD) and higher income grant (tunnel fees from TPG). These buffered losses from its cyber-security business. Earnings included a SGD9.6m migration cost to fibre for 9MFY19. At 83%/85% of our/consensus forecasts, the results were ahead of estimates.
  • Core mobility, pay-TV and broadband segments still weak, with 3Q19 revenue down 11%, 24.8% and 7.7% y-o-y. Mobile postpaid/prepaid ARPU slipped 3-7% q-o-q from weaker voice, data usage and roaming revenues, the impact exacerbated by handset contract amortisation as per SFRS 15 from higher handset sales q-o-q. Management expects competition to remain intense going into FY20 with more mobile virtual network operators (MVNO) likely to enter the fray and the preponderance of SIM-only plans, which are ARPU dilutive.
  • Enterprise business revenue rose 16.8% y-o-y in 3Q19, but losses from cyber-security business widened q-o-q. Management had earlier guided for lower losses going forward. Network solutions business continues to be hampered by contract renewals at a lower price, with managed services providing the buffer.
  • See StarHub Announcements; StarHub Latest News.

Migration to fibre completed.

  • With the completion of cable migration to fibre at end-September, pay-TV and broadband subs base saw notably higher churns. Coupled with promotional offers, both broadband and pay-TV ARPUs slipped to record lows. Management expects the residual impact from the migration to be reflected in 4Q19, with a stable run-rate for pay-TV revenue from 1Q20.
  • STARHUB continues to actively negotiate with content partners to lower content cost (variable cost model pursued) to drive a more sustainable pay-TV business going forward.

Joint bid for 5G spectrum

  • Management sees a standalone 5G network as extremely challenging, given the already-extensive fibre penetration island-wide, and is in discussions with other network operators to jointly bid for spectrum. It believes network sharing would be the most optimal for the industry, with significant capex reductions.
  • We do not rule out STARHUB submitting a joint bid with M1, given that both telcos had deliberated on some network collaborations in the past.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-06
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.44 DOWN 1.520