StarHub - UOB Kay Hian 2020-05-08: 1Q20 Results In Line, Cautious On Near-term Outlook

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STARHUB LTD (SGX:CC3)

StarHub - 1Q20 Results In Line, Cautious On Near-term Outlook

• StarHub's 1Q20 net profit of S$40m (-25%yoy, +15% q-o-q) reflected the travel limitations due to the COVID-19 outbreak. This led to lower usage of roaming services, fewer tourists and weaker handset sales. While we deem the earnings to be within expectations, we expect a weaker 2Q20 (full impact from Singapore) and cut 2020F EPS by 15%.
• StarHub will provide its 2020 guidance in three months’ time.
• Maintain HOLD with a target price of S$1.40.
• Entry price: S$1.20.

StarHub's 1Q20 Results

• StarHub (SGX:CC3) delivered 1Q20 net profit of S$40m (-25% y-o-y, +15% q-o-q), accounting for 22% of our full-year forecast of S$179m. This reflects:
  1. lower roaming and prepaid revenue due to travel restrictions,
  2. lower equipment sales due to retail store closures and handset supply chain disruptions, and
  3. higher provision for bad debt with expectations of payment deferment requests.
• The sequential growth was due to a one-off S$10.6m provision relating to contracted maintenance cost for submarine cables in 4Q19. On dividend, distribution would be revised to a semi-annual basis due to the change in reporting regime.

Key takeaways post StarHub's 1Q20 conference call:

• Deferring 2020 guidance to 2Q20 conference call. Management withheld 2020 guidance due to the uncertain market conditions. That said, management reiterated that the underlying business remains sound and guidance will be given in the next results review when there is more clarity on business longevity and the impact from the pandemic.
• COVID-19 impact. Management guided that travel restrictions due to the COVID-19 outbreak is expected to have a significant impact on prepaid revenue (especially traveller SIMs) and outbound roaming revenue. In addition, muted consumer sentiments amid budget concerns may result in more customers opting for SIM-only plans instead of handset bundling plans. Meanwhile, delays in ICT solution projects and business spending cut backs will adversely impact the enterprise segment.
• Competition landscape. While competition remains intense, StarHub believes it is capable of offering attractive bundle offerings (full suite of service including mobile, Pay- TV, broadband) and will focus on premium customer acquisitions to sustain market share over the mid to long-term.
• 5G journey. The JV with M1 was awarded one of the two nationwide 5G licenses. The JV will be sharing backhaul infrastructure. No capex guidance has been given at this point. StarHub believes 5G would see stronger take-up in the consumer space as 5G handsets will be made available within the next 12-18 months. Conversely, monetisation on the enterprise would take longer given the heavier system integration process. IMDA will announce a more detailed provision on the 5G license by end-June.

StarHub Mobile revenue.

• Service revenue fell 15% y-o-y and 14% q-o-q to S$164m. Key reasons were:
  1. an absence of $8.7m one-off positive adjustment in 4Q19, and
  2. significant drop in tourist-related revenue.
• StarHub’s market share slipped to 24% in 1Q20 (4Q19: 24.6%, 1Q19: 26%). Postpaid saw a net add of 15,000 subscribers. Postpaid ARPU fell 13% y-o-y and 15% q-o-q as a result of lower roaming and plan subscription revenue. Prepaid subscribers fell 74,000 in the absence of tourist arrivals and ARPU fell 15% y-o-y and 15% q-o-q.

Enterprise: Cybersecurity is profitable.

• Enterprise revenue grew 14% y-o-y to S$153m (-2%). This was due to higher cyber security revenue (+ >100% y-o-y, +42% q-o-q). As a result, Ensign turned in a profit of S$5m for the first time since the consolidation in 4Q18, largely attributable to seasonally higher demand from public jobs.

Pay-TV and broadband revenue: Dragged by aggressive promotional activities.

• Pay-TV and broadband revenue dropped 34% y-o-y and 12% y-o-y respectively due to heavy promotional activities relating to the cable-to-fibre migration process.

StarHub's 1Q20 EBITDA margin grew 4.2ppt q-o-q (flat y-o-y), thanks to lean cost structure.

• This was underpinned by:
  1. ongoing operational efficiency strategy;
  2. absence of S$10.9m one-off provision related to contracted maintenance costs in 4Q19, and
  3. lower device cost amid lower handset sales.
• Importantly, management remains committed to pursuing cost optimisation with expected savings of S$210m over 2019-21.

Earnings Revisions

• We expect a weaker 2Q20 and cut 2020 our net profit forecast by 15%.
• We project net DPS of 8 S cents (from 9 S cent)s in tandem with the earnings cut. This translates to a net dividend yield of 5.4% for 2020-22.
• Maintain HOLD with a lowered target price of S$1.40 (COE: 8.8%; terminal growth: 0%) in tandem with the earnings cut.
• See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.
• The weak earnings have been factored into the share price, we opine, as the stock is currently trading below its mean EV/EBITDA of 7.4x. At our target price, the stock trades at 6.5x 2020F EV/EBITDA, -1SD below mean valuation.
• Entry price is S$1.20.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-08

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.40 DOWN 1.450