StarHub - CGS-CIMB Research 2020-08-07: 2Q20 Earnings In Line; Affordable 5G Capex


StarHub - 2Q20 Earnings In Line; Affordable 5G Capex

  • StarHub's 2Q20 core EPS was largely in line, buffered by lower costs. DPS missed.
  • 5G capex guidance of c.S$200m (over 5 years) is lower than expected.
  • Reiterate ADD, with a 6% lower DCF-based target price of S$1.60.

StarHub's 2Q20 core EPS in line; FY20F DPS could miss

  • On lower revenue, StarHub (SGX:CC3)'s 2Q20 EBITDA (ex-Job Support Scheme payout) slid 22.4% y-o-y (-16.5% q-o-q), while core EPS fell 38.8% y-o-y (-39.9% q-o-q). 1H20 EBITDA/core EPS were in line, at 52%/54% of our FY20F forecasts (Bloomberg consensus: 47%/49%).
  • 1H20 DPS of 2.5 Scts missed our forecast (3.0 Scts).
  • StarHub guided for FY20 service revenue to decline 10-12% y-o-y (previous: 1-3% growth), 27-29% service EBITDA margin (unchanged), 6-8% capex-to-sales (ex-5G), minimum 80% dividend payout and 2H20 DPS to be equal to/higher than 1H20’s (previous: 9 Scts DPS for FY20).

Mobile and managed services revenue hit by COVID-19

  • StarHub's 2Q20 mobile service revenue fell 25.4% y-o-y (-12.3% q-o-q) mainly due to lower roaming, IDD and prepaid SIM card sales (COVID-19 travel restrictions), and is likely to remain subdued in 3Q20F, in our view.
  • Pay TV/broadband revenues eased 27.5%/4.2% y-o-y but were stable/+3.6% q-o-q with ARPU and sub churn rates improving slightly.
  • Meanwhile, fixed enterprise revenue rose only 1.7% y-o-y (-6.6% q-o-q), as growth at cybersecurity (+10.1% y-o-y) and data/Internet (+10.9% y-o-y) were offset by 25.4% y-o-y drop (+3.9% q-o-q) in managed services revenue on delayed customer spending due to COVID-19.

Service EBITDA margin saved by additional cost savings

  • StarHub's 1Q20 service EBITDA margin narrowed slightly by 0.3% pt y-o-y (+0.4% pt q-o-q) to 31.5%, as the service revenue drop was offset by cost savings (-16.0% y-o-y, -8.1% q-o-q). As at 2Q20, StarHub has executed 75% of the targeted cost savings of S$210m for FY19-21.

Estimates c.S$200m 5G capex over 5 years; to be front-loaded

  • StarHub guided for its initial investment for 5G rollout to be c.S$200m over 5 years, which includes its 50% share of the StarHub-M1 joint venture company’s (JVCo) capex for radio and spectrum, as well as its own capex for building a 5G core network. This is lower than our previous estimate of S$300m-350m and is a pleasant surprise.
  • StarHub says the capex will be funded 85%/15% by debt/equity and will be front-loaded. Hence, we now assume 60% will be spent in 2H20F-2021F, with the remaining 40% in 2022-25F.

Reiterate ADD; DCF-based Target Price cut by 6% to S$1.60 (WACC: 6.7%)

FOONG Choong Chen CGS-CIMB Research | Sherman LAM Hsien Jin CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-07
SGX Stock Analyst Report ADD MAINTAIN ADD 1.60 DOWN 1.800