STARHUB LTD (SGX:CC3)
StarHub - 4Q19 Within Expectations
- StarHub's 4Q19 net profit of S$35m (+77% y-o-y, -21% q-o-q) was driven by cost discipline and higher handset sales. The q-o-q decline was due to one-off provision of S$10.9m relating to maintenance cost for submarine cable.
- 2019 net profit of S$186m accounts for 101% of our forecast, in line with expectations. Competition was rational in 4Q19. StarHub will focus on driving near-term operational efficiency.
- 1Q20 will be impacted by COVID-19.
- Maintain HOLD and target price of S$1.45. Entry price: S$1.25.
4Q19 RESULTS
- StarHub (SGX:CC3) reported 4Q19 net profit of S$35m (+77% y-o-y, -29% q-o-q). This reflects:
- continuous cost optimisation as StarHub achieved 64% cost savings to-date;
- seasonally higher handset sales; and
- higher cybersecurity and managed service revenue.
- This was partly offset by lower pay-TV revenue and one-off provision of S$10.6m relating to contracted maintenance cost for submarine cable. 2019 net profit of S$186m (- 8% y-o-y) accounts for 101% of our forecast.
- StarHub declared a final 2.25 S cents dividend, bringing full-year net DPS to 9 S cents. This translates into a net dividend yield of 6.0%.
STOCK IMPACT
- Mobile service revenue at S$191m (-2% y-o-y, flat q-o-q). This reflects lower IDD, excess data usage and roaming revenues in the quarter but partly offset by higher plan subscriptions, higher enterprise SMS revenue and reversal of loyalty reward accrual following the change in its customer loyalty programme. StarHub’s market share slipped y-o-y to 24.7% in 4Q19 (3Q19: 24.9%, 4Q18: 26.1%).
- Post-paid service revenue. StarHub added 9,000 post-paid subscribers to 1.45m (+4% y-o-y) while post-paid ARPU fell to S$40 (4Q18: S$41) as a result of dilution from SIM-only plans.
- Prepaid service revenue. Prepaid customer base contracted 1% y-o-y to 0.778m due to continued pre-to-postpaid conversions and lower foreign worker base. Prepaid ARPU declined marginally to S$13 from S$14 in 4Q18.
- Enterprise business. Enterprise revenue accounts for 26% of group revenue. enterprise revenue rose 6% y-o-y and 7% q-o-q to S$155m, driven by cyber security and managed service revenue. Ensign remains loss-making at S$7.6m due to initial investment in R&D and intellectual property that is deemed essential to drive future growth.
- Pay-TV: Stabilised as fibre migration completed. StarHub lost another 18,000 pay-TV subscribers in the quarter but churn rate fell to 0.7% in 4Q19 (3Q19: 2.2%, 4Q18: 1.4%) as the fibre migration programme has completed. Pay-TV ARPU dropped 13% or S$6 y-o-y to S$42 as a result of aggressive promotional activities. Moving forward, management expects ARPU to stabilise as the majority of migrated customers are now on new contracts.
- 4Q19 EBITDA margin grew 4.9ppt yoy, thanks to lean cost structure. This is underpinned by:
- ongoing operational efficiency strategy;
- lower pay-TV content cost on successful contract renegotiations; and
- lower device subsidy.
- EBITDA margin contracted 7ppt q-o-q due to one-off provision of S$10.9m related to contracted maintenance cost for submarine cable. Importantly, management remains committed in pursuing cost optimisation with expected savings of S$210m over 2019-21. This will mainly be driven by workforce optimisation efforts and lower Pay-TV content cost. StarHub’s concerted efforts to negotiate with content partners to shift its content cost structure from a fixed basis to a variable basis has resulted in a total of 20% cost savings as of 30 Dec 19.
EARNINGS REVISION/RISK
- No change to our earnings forecasts.
- 2020 guidance: Higher service revenue but lower EBITDA margin. Service revenue would grow 1-3% in 2020, underpinned by cybersecurity awards, partly offset by lower mobile and pay-TV revenues. Service EBITDA margin is expected at 27-29% on the back of higher mix of enterprise revenue that traditionally yields a lower margin. The guidance also takes in the potential impact of COVID-19 on its roaming revenue.
- Dividend policy remains unchanged. Management remains committed to pay out at least 80% of its profit as dividends, or 9 S cents, for 2020. The distribution would be revised to a semi-annual basis due to the change in reporting regime.
- Capex guidance at 6-7% of total revenue for 2020 (2019: 7.5%), including investment for network superiority, cybersecurity, and the ongoing transformation strategy. This excludes 5G capex and spectrum fees. Importantly, management sees the joint bidding of 5G spectrum with M1 as an advantageous strategy to lower capex burden, creating a more reliable network and induce more innovative products to fend off competition in the market.
VALUATION/RECOMMENDATION
- Maintain HOLD and target price of S$1.45 (COE: 8.8%; terminal growth: 0%), or 5.4x EV/EBITDA. At our target price, the stock trades at 6.2x 2020F EV/EBITDA. Entry price is S$1.25.
- See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News. While near-term competition persists, StarHub’s cost efficiency and potential 5G leap will set the group on a stronger footing to capture revenue growth in the medium term (beyond 2021).
Chong Lee Len
UOB Kay Hian Research
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Chloe Tan Jie Ying
UOB Kay Hian
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https://research.uobkayhian.com/
2020-02-21
SGX Stock
Analyst Report
1.450
SAME
1.450
