StarHub - DBS Research 2020-08-11: Dividend Disappointment Amid Weak Earnings Prospects


StarHub - Dividend Disappointment Amid Weak Earnings Prospects

  • StarHub's 2Q20 net profit of S$37.3m (-7.2% q-o-q, -5.5% y-o-y) was inline; 1H20 dividend per share of 2.5Scts was below our 3.5Scts estimate.
  • Excluding ~S$15m government grant, underlying business is weak due to sharp decline in mobile revenue.
  • HOLD with a lower Target Price of S$1.16; earnings forecasts for FY21/22F slashed by 7%/14%.

StarHub's 2Q20 normalised earnings much below estimates

2Q20 net profit of S$37.3m (-7.2% q-o-q, -5.5% y-o-y) was inline; 1H20 dividend per share of 2.5Scts was below our 3.5Scts estimate.

  • StarHub (SGX:CC3) reported net profit of S$37.3m (- 7.2% q-o-q, -5.5% y-o-y) in 2Q19. However, this includes ~S$15m in Job Support Scheme (JSS) receipts. Adjusting the JSS payout receipts for the impact of taxation, we arrive at a normalised net profit of S$24.7m (-38% q-o-q, -37% y-o-y) for the quarter.
  • The quarterly plunge in revenue by S$52.8m to S$453.4m in 2Q20 could not be offset by the positive impact from the cost savings programme of S$29.5m. As at 2Q20, StarHub had executed ~75% of the ~S$210m cost-savings programme.

2Q20 revenues of S$453.4m takes a quarterly hit of S$52.8m led by decline in mobile service revenue and equipment revenues.

  • Mobile services revenue plunged S$20.1m to S$143.4m (-12% q-o-q, -25% y-o-y) in 2Q20. Postpaid ARPU declined by S$4 during the quarter to S$30 mainly due to lower IDD and roaming charges incurred with the significant drop in global travel caused by the COVID-19 pandemic.
  • While the decline in pre-paid ARPU was marginal, the number of pre-paid subscribers plummeted during the quarter (-20% y-o-y) as tourist arrivals reached naught as a result of border control measures and migrant worker income was heavily affected. Revenue from sales of equipment declined by S$24.1m to S$77.2m (-24% q-o-q, -30% y-o-y) in 2Q20 due to lower volume of handsets sold during the Circuit Breaker period implemented from 7 April to 1 June 2020.

Dividends are likely to be slashed to 5.9 Scts in FY20F despite 5G capex savings from joint venture (JV) with M1.

  • StarHub’s 5.9-Sct dividend per share translates into S$102.2m in total payout.
  • In FY20F we expect StarHub’s operating cash flows to decline by ~S$120m to S$329m compared to operating cash flows of S$400-450m generated annually over FY18/19. A standalone 5G network would have cost StarHub S$450m in annual capex each year.
  • Instead, we expect StarHub to incur an annual capex of S$200m-220m over the next five years as it builds a joint 5G network with M1. However, StarHub might use these saving to carry out additional acquisitions mainly to boost its cyber security business. Taking these into account, we have reduced our FY20F/21F dividend per share to 5.9 Scts each (maintaining the 80% payout ratio) from our earlier 7.3-Sct/6.9-Sct projections respectively.

FY21F/22F earnings forecasts cut by 7%/14% largely due to weak mobile services revenue.

  • We cut StarHub’s earnings forecasts for FY21/22F by 7%/14% as we are of the view that mobile services revenue will be heavily impacted due to SIM-only plans and heightened competition. We have also factored in the continued impact of COVID-19 border control measures on mobile services revenue in FY20F. In addition, the recent capital injection of ~S$170m into TPG might sustain the telco for another two years at least and TPG’s exit might happen in FY22F or later.
  • 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 4.0% which is at its average spread. StarHub will be cutting its dividend payout to 80% from FY20F onwards to ride out the strain on its cashflows.

Sachin MITTAL DBS Group Research | 2020-08-11
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.16 DOWN 1.370