StarHub - UOB Kay Hian 2020-01-21: Gearing For Next Investment Cycle Amid Relatively Stable Operating Landscape

STARHUB LTD (SGX:CC3) | SGinvestors.io STARHUB LTD (SGX:CC3)

StarHub - Gearing For Next Investment Cycle Amid Relatively Stable Operating Landscape

  • STARHUB (SGX:CC3) will remain focused on cost optimisation efforts amid a relatively stable Singapore telco landscape. We note that GIGA has started offering bite-size services to capture market share and we believe the exit of Zero Mobile may lead to competition abating.
  • Separately, StarHub is expected to partner with other MNOs (such as M1) to jointly bid for 5G nationwide spectrum.
  • The stock trades at -2SD below its 5-year mean EV/EBITDA of 8.7x. Maintain HOLD. See StarHub Target Price.
  • Entry price: S$1.25.



WHAT’S NEW


On track to deliver S$210m of cost savings...

  • Broadly, management remains committed to pursuing cost optimisation efforts of S$210m over three years (2019-21). To date, StarHub has achieved more than 60% of its targeted total cost savings, mainly driven by workforce optimisation efforts and lower pay-TV content costs.

…as the company re-negotiates its content cost structure.

  • The proliferation of Over-The-Top (OTT) players have led to declining pay-TV revenue in the past few years. Having said that, StarHub’s concerted effort to continuously negotiate with its content partners to shift its content cost structure from a fixed basis to a variable basis has resulted in a total of 18% cost savings as of 30 Nov 19. By doing so, StarHub pays content costs based on the size of subscriber base and the amount of subscriber revenues not a fixed amount.
  • While most of the content partnership contracts have been converted to new variable cost structure, we believe the remaining contracts will be negotiated within 1H20.

Revamped SIM-only plans by GIGA to offer bite-size services…

  • Within the consumer space, StarHub’s mobile virtual network operator (MVNO) GIGA has launched additional SIM-only postpaid plans. These plans are the S$10 for 5GB and S$45 for 50GB plans on top of the original S$25 for 25GB monthly product (launched in Mar 19). These product enhancements come amid news of Zero Mobile discontinuing services in Singapore and TPG extending its free trial for 300,000 subscribers by another six months.

…as we believe Singapore telcos may have entered an early stage of stabilisation.

  • As a result, we believe existing MVNOs may attempt to revamp their offerings or potentially exit the market to avoid prolonged cash burn. This seems to point to relatively stable operating parameters for Singapore’s telco consumer space, albeit it being in the early stage. We believe TPG may also face difficulty in gaining significant market share within the SIM-only segment given:
    • incumbents’ existing grip on premium paying customers, and
    • the proliferation of MVNOs in Singapore – to fill the space where TPG was targeting.
  • All these seem to suggest that TPG may have to grapple with higher customers churn once the company starts to charge for mobile services. To date, TPG has spent A$147m to roll out its Singapore network vs its planned capex of A$200m-300m.


STOCK IMPACT


Starhub to participate in a 5G consortium to bid for a second nationwide license.

  • The regulator is expected to allocate two nationwide 5G networks and two localised 5G networks by 31 Dec 20. We expect an additional S$1b-2b capex for every successful nationwide bidder as telcos will need to meet the following milestones:
    1. 50% population coverage within two years of spectrum award, and
    2. nationwide coverage within five years from the commencement date of 5G spectrum right, ie by end of 2025.
  • We believe StarHub may partner with other mobile network operators (MNOs) like M1 to jointly bid for a nationwide 5G network. Submission deadline for 5G spectrum bidding is 17 Feb 20. At this juncture, we believe MNOs are deliberating on the consortium make-up and potential sharing of active and/or passive infrastructure.

Growing enterprise business connections…

  • StarHub’s enterprise business segment has been delivering mid-teens y-o-y revenue growth for the past nine quarters, mainly driven by higher cyber security and managed service revenue. The enterprise business accounted for 25% of 3Q19’s group revenue, and we expect this division to cushion near-term weakness in the mobile services and pay-TV segment.
  • That said, talent management and acquisition remain challenging as StarHub will need to expand its current c.500 analysts to grow the cyber security business. To recap, StarHub reported 9M19 operational loss of S$16m within the cyber security segment.

…as telcos build business cases for 5G commercial rollout.

  • We believe the incremental opportunities of 5G investment will rely heavily on enterprise business solutions as consumer rollout may promise little ARPU uplift potential. Some of the business cases may include artificial intelligence (AI) driven industrial devices, network slicing monetisation and IoT services for smart buildings/smart cities and so forth.
  • The big picture is that the rollout of 5G would help to support high volume of data transmission and eventually unlock more opportunities for telcos to provide advanced enterprise business solutions.


EARNINGS REVISION/RISK


Pricing in ARPU decline, amid on a low base.

  • We have pencilled in a 2% ARPU decline in 2020 vs 5% for 4Q19 and 10% in 3Q19. We project net profit of S$175m for 2020 and S$152m for 2021.
  • Key risks include:
    1. faster-than-expected proliferation of OTT, resulting in a key threat to StarHub’s pay-TV business,
    2. widening losses in its cyber security business, and
    3. more aggressive price competition with the impending entry of TPG.

Healthy dividend.

  • We believe management could maintain its guidance of 9 S cents for 2019. This translates to a net dividend yield of 6.1%.


VALUATION/RECOMMENDATION






Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-01-21
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.450 SAME 1.450



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