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

STARHUB LTD (SGX:CC3)

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.

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.

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.

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