StarHub - DBS Research 2020-06-22: Delay In Industry Consolidation?


StarHub - Delay In Industry Consolidation?

  • TPG Australia injects S$174m in TPG Singapore which may delay industry consolidation by 1-2 years in our view.
  • FY20F/21F earnings forecast reduced by 7%/10% and expect earnings stabilisation from FY22F onwards.
  • Downgrade StarHub to HOLD with lower Target Price of S$1.37.

HOLD StarHub for > 5% sustainable dividend yield while waiting for industry consolidation.

  • While we continue to believe that TPG does not have a business case in Singapore, the recent capital injection of S$174m into TPG might help it to sustain for another two years and industry consolidation could be delayed to 2022 vs. our previous expectation of 2020 or 2021. Thus, we cut StarHub (SGX:CC3)’s FY21F/22F earnings by 7%/10% and expect earnings stabilisation from FY22F onwards vs. FY21F previously.
  • We also reduce FY20F/21F dividend per share (DPS) to 7.3Scts/ 6.9Scts (80% payout ratio) from 9Scts each as StarHub might want to retain some cash for future acquisitions, in our view. See StarHub Dividend History.

Capital injection of S$174m to sustain TPG till end of FY22F

TPG, Australia plans to demerge its Singapore interests into ‘Tuas Group’.

  • TPG, Australia plans to demerge its Singapore operations into a new entity called ‘Tuas Group’ before completing its own merger with Vodafone’s Australian business. Tuas Group will comprise Tuas, TPG Singapore and Tuas Solutions.
  • Tuas Group (referred to as Tuas from here onwards) will take over TPG’s 4G network in Singapore and will be hived-off and listed as a separate stand-alone entity on the Australian Securities Exchange (ASX). The shares of the newly listed entity are expected to commence trading on a normal settlement basis by mid-July 2020.

TPG Australia has capitalised Tuas with additional cash and cash equivalents of S$174m in May 2020.

  • Prior to the expected demerger of Tuas, TPG Australia has capitalised Tuas with incremental equity funding, resulting in a total share capital balance of S$525m. Thus, at the point of demerger, Tuas is expected to have cash or cash equivalents of ~S$130m (S$174m infused in May 2020).
  • Tuas’ management believes that it will have enough cash reserves to meet its current obligations to complete the rollout of the TPG Singapore mobile network in Singapore and to fund the business plan to reach the planned operating EBITDA breakeven point. Tuas expects that TPG Singapore will reach EBITDA breakeven once it has acquired ~400,000-500,000 mobile subscribers, which is approximately 4-5% market share of Singapore’s total mobile subscribers.
  • If additional funding is required, Tuas expects that it will be able to raise additional equity or external debt financing given
    1. the substantial nature of Tuas as a standalone entity (at the point of demerger, the entity is expected to have net assets of ~S$500m);
    2. Tuas will be debt-free and will be separate from the existing liabilities of TPG Australia and
    3. TPG Singapore will have a functioning and substantially complete mobile network.

In our opinion, the additional funding will extend the life of TPG Singapore till FY22F.

  • See StarHub - DBS Research 2020-05-08: Sector Consolidation On The Cards? In our previous base-case scenario, we expected TPG to exit Singapore operations in FY20F or FY21F, given the funding constraints. However, given the additional net funding of S$174m in May 2020, we expect TPG Singapore’s life to be extended by two years, thus pushing TPG’s potential exit from Singapore market to the end of FY22F.
  • In December 2018, TPG Singapore launched a free service trial. The free trial available to new users ceased from 31 March 2020 onwards. TPG Singapore launched its first paid plan on 31 March 2020; SIM-only 4G postpaid mobile plan for S$10 is valid for 30 days.
  • See previous report: Telecom Sector Singapore - DBS Research 2020-04-01: TPG’s Commercial Launch After A Long Wait. As at 30 April 2020, TPG Singapore had ~7,000 paying subscribers and ~412,000 (vs. ~300,000 in October 2019) free trial users, translating to ~4.4% of Singapore mobile customer base. Thus, if TPG performs as per management expectations, the telco is likely to generate ~S$24m (S$10 ARPU, 200,000 subscribers) in revenue in 2021 and S$58m (S$12 ARPU, 400,000 subscribers) in 2022 and gain ~2.0% and 4.0% market share respectively.
  • However, according to our estimates, TPG needs S$100-110m revenue to reach EBITDA breakeven. We have assumed that TPG can secure 25% EBITDA margins by 2025 (near StarHub’s margins) and then we worked backwards to estimate EBITDA in the previous years assuming 90% of the incremental revenue flows directly to the EBITDA.
  • As of February 2020, TPG had spent ~S$208m in cumulative capex on its Singapore rollout, out of its planned S$200-300 of capex. At the point of demerger in July 2020, we expect the total capex spend to reach ~S$250m. To put this in perspective, StarHub typically incurs ~S$200m plus capex annually to expand and upgrade its network. Hence, as things stand, we do not expect TPG to be a disruptive force. However, we believe that the additional funding injection of S$174m (S$130m to remain at the point of demerger) will see TPG through another two years.

TPG is on track to achieve Infocomm Media Development Authority’s (IMDA) network coverage requirements.

  • Since TPG Singapore was announced as the successful bidder at the spectrum auction in December 2016, the telco has made significant progress in establishing its 4G mobile network infrastructure. TPG Singapore achieved ~99.7% overall outdoor mobile network coverage and met IMDA’s indoor Quality of service (QoS) requirements as at 31 March 2020.

Without a Nationwide 5G licence, TPG’s network would not be future proof.

  • Although TPG Singapore submitted a proposal to the IMDA to acquire spectrum in the 3.5 GHz band and win one of the two nationwide 5G licences, the IMDA announced in April 2020 that TPG Singapore was not successful. Instead TPG Singapore is only eligible to apply for and be allocated up to 800 MHz of mmWave spectrum for localised 5G rollouts at the end of 2020. See previous report: StarHub - DBS Research 2020-04-30: 5G To Improve Medium-Term Prospects.
  • Without a Nationwide 5G licence, TPG’s network would not be future proof as there will be 5G coverage across at least half of Singapore by the end of 2022. We cannot identify a reason for TPG to stay in a loss-making business with bleaker prospects in a 5G world, beyond FY22F.

StarHub's FY21F/22F earnings forecasts cut by 7%/10% due to the capital injection into TPG.

  • We cut StarHub’s earnings forecasts for FY21/22F by 7%/10% as we are of the view that the recent capital injection of ~S$170m into TPG might sustain for another two years at least and TPG exit might happen in FY22F or later. From FY22F onwards, we expect the earnings to stabilise vs. FY21F previously.
  • We have also reduced our FY20F/21F dividend per share to 7.3Scts/6.9Scts (maintaining the 80% payout ratio) from our earlier 9Scts projection each as StarHub might seek to retain some cash for acquisitions in the future. See StarHub Dividend History.
  • Downgrade to HOLD with lower Target Price of S$1.37.
  • In our DCF valuation (WACC 7.9%, terminal growth 1%), we raise our WACC from 7.8% to reflect the higher market volatility and risk premiums. Our Target Price translates into 6.6x 12-month forward EBITDA at a 7% premium to the regional average of 6.2x, reflecting the benefits from 5G revenue and higher terminal growth rate of 1% (vs. 0% previously) as 5G will catalyse growth from enterprises.
  • See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.
  • StarHub is currently trading at a FY21F dividend yield spread of 4.3% vs. average of 4.0%. We project StarHub to cut its dividend payout to 80% from FY20F onwards to ride out the strain on its cashflows.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-06-22
SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.37 DOWN 1.750