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

STARHUB LTD (SGX:CC3)

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.

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).

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.

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.

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.

We cut StarHub's FY20-22F core EPS by 3-30% to bake in a bigger hit from COVID-19 in FY20F and an extended impact into 1H21F. Our Target Price is trimmed by 6%, partly offset by a rollover of the DCF base year and lower 5G capex.
We lower payout ratio for FY20F to 80% (from 100%), given lower-than-expected 1H20 DPS. StarHub's 12.0x FY21F EV/OpFCF is at 15% discount to/0.8 s.d. below its 12-year mean, with 3.5-5.0% FY20-22F yields.
See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.
Potential re-st: above-guidance cost cuts.
Downside risk: keener competition.

FOONG Choong Chen CGS-CIMB Research | Sherman LAM Hsien Jin CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-07

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